-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OABDl0OYhxD06xnGs6Crb1eFeGcGsbbPMTy9CMYAHQAv49bWwZUhbHM0VAt3B1cV SRPt9kQ5P/EvqsELpLjjJQ== 0000950124-99-005264.txt : 19990927 0000950124-99-005264.hdr.sgml : 19990927 ACCESSION NUMBER: 0000950124-99-005264 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERCEPTRON INC/MI CENTRAL INDEX KEY: 0000887226 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 382381442 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20206 FILM NUMBER: 99716987 BUSINESS ADDRESS: STREET 1: PERCEPTRON INC STREET 2: 47827 HALYARD DR CITY: PLYMOUTH STATE: MI ZIP: 48170-2461 BUSINESS PHONE: 3134144816 MAIL ADDRESS: STREET 1: PERCEPTRON INC STREET 2: 47827 HALYARD DRIVE CITY: PLYMOUTH STATE: MI ZIP: 48170-2461 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JANUARY 1, 1999 TO JUNE 30, 1999. COMMISSION FILE NUMBER: 0-20206 PERCEPTRON, INC. (Exact name of registrant as specified in its charter) Michigan 38-2381442 (State or other jurisdiction or (I.R.S. Employer incorporation or organization) Identification No.) 47827 Halyard Drive Plymouth, Michigan 48170-2461 (734) 414-6100 (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the act: None Securities registered pursuant to section 12(g) of the act: COMMON STOCK, $0.01 PAR VALUE RIGHTS TO PURCHASE PREFERRED STOCK (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on September 15, 1999, as reported by The Nasdaq Stock Market, was approximately $32,600,000 (assuming, but not admitting for any purpose, that all directors and executive officers of the registrant are affiliates). The number of shares of Common Stock, $0.01 par value, issued and outstanding as of September 15, 1999, was: 8,169,152. - -------------------------------------------------------------------------------- 2 PART I ITEM 1: DESCRIPTION OF BUSINESS GENERAL Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures and markets information-based measurement and inspection focused solutions for process improvement. The Company's systems provide process information to address a number of measurement, guidance and inspection applications. Among the product solutions offered by the Company are: (1) Gauging systems that provide for 100% inline measurement for reduction of dimensional process variation; (2) Systems that guide robots to perform precise tasks on the assembly line; (3) Systems that inspect and detect defects on painted surfaces, and; (4) Forest products sawmill systems that optimize the lumber production process. Perceptron's product offerings are designed to improve quality, increase productivity and decrease costs in the automotive and forest products industries, as well as in a variety of other industries such as aerospace and steel production. The Company has two primary business segments: The Automotive business unit segment and the Forest Products business unit segment. The Company has been selling to the automotive industry since its inception in 1981. In 1997, the Company acquired Autospect, Inc. ("Autospect") in order to develop products to expand its offerings to the automotive paint shops. Products that are released and are under development include those that identify defects in bare metal prior to paint, measure the thickness of wet paint non-destructively, and inspect finished painted bodies for a variety of defects. In 1999, the Company merged Autospect with and into the Company and Autospect is now operated as part of the Automotive business unit. The Company's Forest Products business unit was created with the 1997 acquisitions of Trident Systems, Inc. and Nanoose Systems Corporation. In October 1998, the Company expanded its forest products offerings by acquiring the assets and ultrasound intellectual property from Sonic Industries, Inc. and Sonic Technologies, Inc. The Company has engineering, selling, assembly and installation resources in place to support customer requirements for both of these market segments. The Company's current principal products are based upon proprietary three-dimensional image processing and feature extraction software algorithms combined with two distinct three-dimensional object imaging technologies: TriCam(TM) and LASAR(TM). TriCam(TM) technology uses structured laser light triangulation techniques to obtain accurate three-dimensional measurements. TriCam(TM) systems are used to measure formed parts for process control, to provide robot guidance for automated assembly tasks and to perform non-contact alignment functions. TriCam(TM) is also used by the Forest Products business unit to measure three-dimensional shapes of trees, logs, boards and by-products. LASAR(TM) provides accurate three-dimensional measurements of a full scene over a larger field of view than does TriCam(TM). The LASAR(TM) product is used by the Forest Products business unit for the three-dimensional measurement of stems, logs, and cants. The Company was incorporated in Michigan in 1981. Its headquarters are located at 47827 Halyard Drive, Plymouth, Michigan 48170-2461, (734) 414-6100. The Company also has operations in Ann Arbor, Michigan; Atlanta, Georgia; Hatboro, Pennsylvania; British Columbia, Canada; Munich, Germany; Seoul, South Korea; Rotterdam, The Netherlands; Sao Paulo, Brazil and Tokyo, Japan. MARKETS The Company has a multiple market approach, with the main focus being the automotive industry. The Company has product offerings encompassing the entire automobile manufacturing line, including stamping, general assembly, paint, trim and final assembly. Perceptron's purchase of Trident and Nanoose in 1997 and Sonic assets in 1998 increased its product and marketing efforts in the forest and wood products markets. The Company believes that there may be potential applications for its three-dimensional measurement systems in non-automotive industries as diverse as aerospace, food processing, appliances, robot and autonomous vehicle guidance, and others. The foregoing statement is a "forward looking statement" within the meaning of the Securities Exchange Act of 1934, as amended ("Exchange Act"). See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement". PRODUCTS AND APPLICATIONS AUTOMOTIVE BUSINESS UNIT Assembly Process Control System ("P-1000"): The P-1000 system, which uses TriCam sensors, has been sold primarily to automotive manufacturers to measure large formed vehicle body parts and assembled vehicle bodies. This system, which has also been sold to the appliance industry, is used by manufacturers of large formed parts and assemblies for process control. Installed directly in the customer's manufacturing line, typically in connection with new model re-tooling programs, the P-1000 system rapidly measures critical dimensions and performs analyses to reduce part-to-part variation and deviations 2 3 from design intent. By continually measuring and analyzing sources of variation, the manufacturer can more quickly identify and correct manufacturing process faults, thereby preventing defects from reaching the ultimate customer. The P-1000 enables customers to reduce cost and increase both quality and throughput by measuring and analyzing sources of variation to achieve continuous process improvement. In addition, the P-1000 enables customers to shorten the time it would otherwise take to launch a new product. Intelligent Process Network ("IPNet(TM)"): IPNet(TM) is a sophisticated and innovative new process control solution that links Internet technology with plant-floor process management. The PC-based IPNet(TM) system provides the capability for collection of in-line measurement information at any point in the build or assembly process and the ability to monitor, analyze and distribute that information throughout a plant or enterprise. IPNet(TM) uses Perceptron's new line of digital sensors, and features an Internet Explorer graphical interface, distributed and modular scalability to accommodate various sized systems, and an open architecture that permits the integration of third-party devices. Robot Guidance System for automated assembly ("RGS"): The RGS system, which is used for flexible assembly, incorporates TriCam(TM) sensors and high-speed digital process electronics and proprietary software to provide robots three-dimensional visual guidance to perform a variety of automated assembly tasks. The RGS optically locates the position on an object and instructs a robot to perform work on the located object. This product was developed in cooperation with Mercedes-Benz, which provided specifications to enable the system to address a broad range of applications. Other automotive companies, including General Motors, Ford, Volvo, BMW and Opel, are currently using RGS systems. The RGS system is currently used primarily by automotive companies in the following applications, among others; windshield insertion, door assembly and installation, hood and trunk lid installation, fuel tank installation, fender mounting and instrument panel installation. Non-Contact Wheel Alignment System ("NCA"): The NCA system, which uses TriCam(TM) three-dimensional machine vision technology, was developed in close cooperation with Ford Motor Company, which helped fund and was instrumental in testing the technology. The NCA system is incorporated into original equipment manufacturers' ("OEMs") wheel alignment equipment and offers a fast and accurate non-contact method to align wheels, which reduces costly in-plant maintenance of mechanical wheel alignment equipment. The Company supplies NCA systems to the automotive market through a number of OEMs. In connection with the settlement of certain litigation filed by the Company against Fori Automation alleging infringement of certain of the Company's patents relating to non-contact wheel alignment systems, the Company has licensed such patents to Fori on a non-exclusive basis. ScanWorks(TM): The ScanWorks(TM) measurement and dimensional analysis software incorporates proprietary feature extraction algorithms, CAD data input, CAD to scan comparison, data filtering and motion device interfaces in an operator friendly, WindowsNT Graphical User Interface ("GUI"). The ScanWorks(TM) GUI links the operator with measurement products such as the Company's OptiFlex-Pro (formerly called Optical Checking Fixture) and OEM products. OptiFlex-Pro is a non-contact three-dimensional surface scanner. Dimensional Data Management ("DDM"): The DDM is a system that consolidates in-line measurement data and provides data analysis tools to help identify, trace, and eliminate sources of process variation and deviation from design intent. The DDM product consists of both server and client software. The server collects and stores dimensional data in a single database from Perceptron measurement systems. The client software provides multiple users, both local and remote, with the capability of monitoring and analyzing dimensional data. QMS-I: The QMS-I is a measurement system for coated surfaces. The QMS-I checks the painted surface quality of each vehicle as it exits the paint oven, providing in-line quality trend analysis and process control information by vehicle color, model, shift, etc. It generates four objective, repeatable, and reproducible ratings of coated surfaces. Measurements are taken in seconds, and data analysis is automated. With this information corrective action can be taken before quality drops below acceptable levels. The QMS-I interfaces with the Autospect "Paint Process Monitor" ("PPM"), a network that sends trend and quality data to the plant and corporate paint supervision. The information provided allows quick reaction to process changes, resulting in improved quality and cost savings. The QMS-Battery Portable ("QMS-BP"), a hand-held meter providing the same readings as the QMS-I, is used to monitor incoming parts and is used in paint laboratories. PaintScan: The PaintScan system (formerly Industrial Dirt Counter) checks the amount of dirt and other defects that affect the painted surface quality of a vehicle. The system prints out a profile of the vehicle and shows the location of the defects to assist in repair. The system also provides trend analysis and process control information to assist management in controlling the process. The PaintScan system is in the final stages of Beta testing at a customer site. 3 4 FOREST PRODUCTS BUSINESS UNIT General: The Forest Products business unit sells a complete line of products for mill wide scanning and optimization. These systems are based on an architecture of optimization modules that contain common user interfaces, reporting systems and scanning interfaces. The system runs on the WindowsNT platform. Scanning and optimization systems are sold directly to sawmills and to a large number of sawmill machinery manufacturers and systems integrators. One of the distinct advantages of the Perceptron system is that it can operate on any manufacturer's equipment. This allows the sawmill to choose the best mechanical system for its own operations and receive the benefit of the Company's scanning and optimization systems within the facility. True Shape Bucking System ("TSB"): The TSB system optimizes the process of cutting tree stems into logs. The system utilizes TriCam(TM) or LASAR(TM) scanners to create a high density 3D surface map of a tree stem that needs to be cut or "bucked" into logs. The stem is either scanned as it is conveyed lineally through an arrangement of TriCam(TM) sensors or is scanned at rest with a LASAR(TM) sensor. Optimization software then fits the customer's final products into the model of the tree stem to determine the highest value manner in which to cut up the stem to feed the sawmill. By controlling the raw material as it enters the sawmill, mill production rates can be increased, more lumber can be extracted from the same input raw material and higher quality lumber can be produced. True Shape Log Optimizer System ("TSO"): The TSO system optimizes the process of log breakdown. The system utilizes TriCam(TM) or LASAR(TM) scanners to create a high-density 3D surface map of a log. Optimization software fits the customer's final products into the model of the log to determine the highest value manner in which to cut up the log. The TSO system enables lumber manufacturers to optimize the value from the logs in the sawmill by using analysis algorithms to statistically evaluate the log topography to optimize what grade lumber should be cut from the log. The addition of a TSO to a sawmill increases the amount and value of the final products that can be derived from the input logs. True Shape Log Sorter System ("TSS"): The TSS system optimizes the process of log sorting. Certain customers prefer to sort logs into batches with common characteristics and then feed them into the sawmill at high rates with a fixed cutting scenario or pattern. The system utilizes TriCam(TM) scanners to create a high-density 3D surface map of a log. Optimization software fits all of the potential customer cutting scenarios into the log models and sorts the logs by the pattern that will produce the highest value. The TSS system allows lumber manufacturers to optimize the value of the logs entering the sawmill based on pre-defined patterns. This technique provides an increased value over past systems that simply measured the small end diameter of the log as the sorting criteria. True Shape Cant Optimizer System ("TSC"): The TSC system optimizes the process of cant (a log with two cut sides) breakdown. The system utilizes TriCams, Transverse TriCams (a TriCam(TM) derivative sensor in which the cant is scanned as it is conveyed transversely though an arrangement of special TriCams) or LASAR(TM) scanners to create a high-density 3D surface map of the cant. Optimization software fits the customer's final products into the model of the cant to determine the highest value manner in which to cut up the cant in the sawmill. The TSC system can model either straight sawing systems or the recently popular curve sawing systems. The optimization software can also process grade-input data to facilitate high-grade cutting patterns for maximum grade utilization. True Shape Edger Optimizer System ("TSE"): The TSE system optimizes the process of flitch edging (a flitch is an un-edged board cut from the side of a log) by utilizing TriCams or Transverse TriCams scanners to create a high-density 3D surface map of the flitch. Optimization software fits the customer's final board products into the model of the flitch to determine the highest value manner in which to cut up the flitch in the sawmill. True Shape Trimmer Optimizer System ("TST"): The TST system optimizes the processes of board trimming by utilizing Transverse TriCams scanners to create a high-density 3D surface map of the untrimmed board. Optimization software fits the customer's final board products into the untrimmed board model to determine the highest value manner in which to trim the board. Mill Controller System: The Mill Controller system is a software package that allows sawmill operators to define what orders they need filled for their customers. The system links this information with the optimizers in the sawmill to produce the lumber required to fill these orders. The Mill Controller adds a level of control to the sawmill operator that was previously unavailable. Typical optimizer systems attempt to maximize recovered value from raw material without regard to the actual orders that the sawmill needs to fill. By utilizing the Mill Controller, the sawmill can now balance value-based recovery with the time based requirement to fill orders. 4 5 Lumber Analyzer System: The Lumber Analyzer system utilizes ultrasonic technology to find defects in finished lumber. Defects such as splits, rot, voids and cracks are important to secondary manufacturers who process dried lumber into finished products such as furniture and moldings. The application of a Lumber Analyzer system can save secondary manufacturers money by identifying these defects and improving cutting decisions and raw material utilization. The Lumber Analyzer system is in Beta testing at a customer site. SALES AND MARKETING To date, the Company has marketed its systems either directly to the end users of the Company's systems, or to system integrators, value-added resellers ("VARs") or OEMs who in turn sell to the same end users and offer access to new markets. The Company's direct sales efforts are conducted by the Company's account executives. These account executives develop a close consultative selling relationship with the Company's customers. Perceptron's senior management works in close collaboration with customers' senior executives. The Company intends to continue this marketing strategy for its automotive and aerospace process control systems and for selected forest and wood products applications. With respect to the RGS system for robot guidance, the NCA system for wheel alignment, various aerospace sales activities and sales to the forest and wood products industry, the Company's marketing strategy is focused primarily on sales to selected system integrators, OEMs and VARs who integrate the Company's products into their systems for sale to end user customers. The Company has formed an Emerging Markets business unit. This unit is charged with finding and developing applications for existing software and hardware products in aerospace markets as well as bringing to market several new software product offerings. The Company's principal customers have historically been automotive companies that the Company either sells to directly or through system integrators or OEMs. The Company's products are typically purchased for installation in connection with new model re-tooling programs undertaken by these companies. Because sales are dependent on the timing of customers' re-tooling programs, sales by customer vary significantly from year to year, as do the Company's largest customers. For the six months ended June 30, 1999, approximately 25% of total revenues were derived from three automotive companies (General Motors, Ford and DaimlerChrysler). For the years ended December 31, 1998, 1997 and 1996, approximately 22%, 38% and 46%, respectively, of total revenues were derived from the same three customers. For the six months ended June 30, 1999 and years ended December 31, 1998, 1997 and 1996, 8%, 13%, 17% and 16% of net sales, respectively, were to system integrators and OEMs for the benefit of the same three automotive companies. During the six months ended June 30, 1999, sales to DaimlerChrysler and KUKA Schweissanlagen each exceeded 10% of the Company's total net sales. MANUFACTURING AND SUPPLIERS The Company's manufacturing operations consist primarily of final assembly and testing, along with integrating the Company's software with individual components, including printed circuit boards, which are manufactured by third parties according to Company developed designs. With a low level of vertical integration, the Company believes it gains significant manufacturing flexibility, while minimizing total product costs. The Company purchases a number of component parts and assemblies from single source suppliers. With respect to most of its components, the Company believes that alternate suppliers are readily available. Significant delays or interruptions in the delivery of components or assemblies by suppliers, or difficulties or delays in shifting manufacturing capacity to new suppliers, could have a material adverse effect on the Company. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000 Readiness Disclosure". INTERNATIONAL OPERATIONS Europe: The Company's European operations have contributed approximately 39%, 30%, 23% and 20% of the Company's revenues during the six months ended June 30, 1999 and the years ended 1998, 1997 and 1996, respectively. The Company's wholly-owned subsidiary, Perceptron Europe B.V. ("Perceptron B.V."), is located in Rotterdam, The Netherlands. Perceptron B.V. holds a 100% equity interest in Perceptron Europe GmbH ("Perceptron GmbH"), which is located outside of Munich, Germany. The Company currently employs 41 people in its European operations. Asia: The Company operates a direct sales and application office in Seoul, Korea and a branch sales office in Tokyo, Japan. South America: The Company has a direct sales office in Sao Paulo, Brazil to service automotive customers in South America. The Company's foreign operations are subject to certain risks typically encountered in such operations, including fluctuations in foreign currency exchange rates and controls, expropriation and other economic and local policies of foreign governments, 5 6 and the laws and policies of the U.S. and local governments affecting foreign trade and investment. For information regarding net sales, operating profit (loss) and identifiable assets of the Company's foreign operations, see Note 14 to the Consolidated Financial Statements, "Segment and Geographic Information". COMPETITION The Company believes that the principal competitive factors in the Company's automotive markets are total capability as a process control system and, with certain of the Company's products, system price. There are a number of companies that sell similar and/or alternative technologies and methods into the same markets as the Company. The Company believes that the principal competitive factors in the Company's forest and wood products markets are its capability as a process control system and the value added when installed in a wood mill. In the forest and wood products markets, there are a number of companies that sell similar and/or alternative technologies and methods into the same markets as the Company. The Company believes that there may be other entities, some of which may be substantially larger and have substantially greater resources than the Company, which may be engaged in the development of technology and products, which could prove to be competitive with those of the Company. In addition, the Company believes that certain existing and potential customers may be capable of internally developing their own technology. There can be no assurance that the Company will be able to successfully compete with any such entities, or that any competitive pressures will not result in price erosion or other factors, which will adversely affect the Company's financial performance. BACKLOG As of June 30, 1999, the Company had a total backlog of $27.8 million, compared to $23.5 million at December 31, 1998 and $24.2 million as of December 31, 1997. The Automotive business unit's backlog was $22.5 million, $17.9 million and $18.4 million at June 30, 1999, December 31, 1998 and 1997, respectively. The Forest Products business unit's backlog was $5.3 million, $5.6 million and $5.8 million at June 30, 1999, December 31, 1998 and 1997, respectively. Most of the backlog is subject to cancellation by the customer. The level of order backlog at any particular time is not necessarily indicative of the future operating performance of the Company. The Company expects to be able to fill substantially all of the orders in its backlog by June 30, 2000. RESEARCH AND DEVELOPMENT As of June 30, 1999, 114 persons employed by the Company were focused primarily on research, development and engineering relating to three-dimensional machine vision systems and related software. For the six months ended June 30, 1999 and years ended December 31, 1998, 1997 and 1996, the Company's research, development and engineering expenses were $6.5 million, $11.4 million, $8.9 million and $7.3 million, respectively. The Company engages in research and development ("R&D") to enhance its existing products, to adapt existing products to new applications and to develop new products to meet new market opportunities. The Company is involved in a continuous product improvement program for its products intended to enhance performance, reduce costs and incorporate new technological advances. To this end, the Company is engaged in strategic alliances with a number of research and development institutions. Recent customer recognition of the power of Web-based or Web-like informational navigation for manufacturing operations has involved the Company in pilot projects for widely distributed measurement systems and remote information accessibility. The Company has received a NIST-ATP award to participate in a joint venture to develop a robot guidance system for powertrain assembly automation. The Company's in-kind development contribution is approximately $500,000 over a four-year period that began in 1998. The joint venture is administered by the National Center for Manufacturing Sciences and includes a major automotive manufacturer. In late 1995, Autospect received a $1.8 million NIST grant that provided funding over three years for development of a system to measure the thickness of wet film (e.g. paint). During 1998, 1997 and 1996, the Company recorded reimbursements of $800,000, $600,000 and $400,000, respectively, which offset the related costs. Prototype testing was completed in 1998. The system was installed in a manufacturing environment during the first six months of 1999 and is currently being tested. PATENTS, TRADE SECRETS AND CONFIDENTIALITY AGREEMENTS The Company owns eleven U.S. patents and ten pending U.S. patent applications, which relate to various products and processes manufactured, used, and/or sold by the Company. In addition, the Company also owns corresponding foreign patents in Canada, Europe and Japan and has several patent applications pending in foreign locations. These U.S. patents expire from 2004 through 2016 and the Company's existing foreign patent rights expire from 2008 through 2011. 6 7 The Company has been informed that certain of its customers have received allegations of possible patent infringement involving processes and methods used in the Company's products. Certain of these customers, including one customer who was a party to a patent infringement suit relating to this matter, have settled such claims. Management believes, however, that the processes used in the Company's products were independently developed without utilizing any previously patented process or technology. Because of the uncertainty surrounding the nature of any possible infringement and the validity of any such claim or any possible customer claim for indemnity relating to claims against these customers, it is not possible to estimate the ultimate effect, if any, of this matter on the Company's financial position. The Company has registered, and continues to register, various trade names and trademarks, including SCANWORKS, OPTIFLEX, PERCEPTRON, DATACAM, LASAR, VERISTAR, DRISCAN, TRICAM, AUTOSPECT, IPNET and PAINTSCAN, among others, which are used in connection with the conduct of its business. The Company's software products are copyrighted and generally licensed to customers pursuant to license agreements that restrict the use of the products to the customer's own internal purposes on designated Perceptron equipment. EMPLOYEES As of June 30, 1999, the Company employed 338 persons. None of the employees are covered by a collective bargaining agreement and the Company believes its relations with its employees to be good. ITEM 2: FACILITIES Perceptron's principal domestic facilities consist of a 70,000 square foot building located in Plymouth, Michigan, owned by the Company, a 20,500 square foot leased facility in Ann Arbor, Michigan, a 13,000 square foot leased building in Atlanta, Georgia and a 3,500 square foot leased facility in Hatboro, Pennsylvania. In addition, the Company leases a 1,350 square meters facility in Munich, Germany, a 1,000 square foot facility in Rotterdam, The Netherlands, a 6,200 square foot facility in British Columbia, Canada, and offices in Sao Paulo, Brazil, Seoul, Korea and Tokyo, Japan. Primary facilities used by the Automotive business unit are Plymouth and Ann Arbor, Michigan and the German and The Netherlands locations. Primary facilities used by the Forest Products business unit are Plymouth, Michigan, Atlanta, Georgia, and the Canadian location. The Company believes that its current facilities are sufficient to accommodate its requirements through the year 2000. ITEM 3: LEGAL PROCEEDINGS On December 11, 1998, a jury in a civil case in the U.S. District Court for the Eastern District of Michigan returned a favorable judgement for the Company and awarded damages of over $732,000. The suit, filed by the Company in June 1996, charged Sensor Adaptive Machines, Inc. ("SAMI") with violation of a covenant not to compete. SAMI filed counterclaims against the Company alleging, in part, that the Company was engaged in unlawful monopolization and tortious interference with business practice and sought damages. In response to a motion for summary disposition filed by the Company, the counterclaim for unlawful monopolization was dismissed by the court in June 1998. The jury found that the remaining counterclaims were without merit. On March 4, 1999, the Company's motion for interest was granted. SAMI has appealed the judgement including the counterclaims against the Company. On September 25, 1998, the U.S. District Court for the Eastern District of Michigan dismissed, with prejudice, a suit filed against the Company by Speroni, S.p.A. ("Speroni"). Speroni has appealed the dismissal. The suit alleged tortious interference in conjunction with exclusive distributorship contracts covering the sale of P-1000 products in Italy and France between Perceptron B.V., a wholly-owned subsidiary of the Company, and Speroni. Speroni sought unspecified compensatory damages and punitive damages. Perceptron B.V. terminated the exclusive distributorship contracts in 1997 for breach of contract by Speroni and has sought arbitration of this matter with the International Chamber of Commerce International Court of Arbitration ("ICC"), to confirm the terminations and to award damages. Speroni has filed counterclaims with the ICC alleging breach of the exclusive distributorship contracts and seeking damages of $6.5 million. An arbitration hearing has been conducted and Perceptron B.V. is awaiting the decision of the arbitrator. The Company intends to vigorously pursue its claims and defend Speroni's claims. 7 8 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on June 24, 1999 at which the following action was taken: 1. The Shareholders elected the following persons as the Company's Board of Directors, and the results of the vote on this matter were as follows:
Name For Withheld Broker Non-Votes ------------------ ----------- --------- ---------------- David J. Beattie 5,644,548 497,849 - Philip J. DeCocco 5,643,816 498,581 - Robert S. Oswald 5,644,704 497,693 - Alfred A. Pease 5,644,066 498,331 - Terryll R. Smith 5,643,860 498,537 -
2. The Shareholders approved an amendment to the Company's 1992 Stock Option Plan to increase the shares of Common Stock available for grant under such plan by 300,000 shares. As to this proposal, 2,244,284 shares voted "for", 1,188,964 shares voted "against", 749,448 shares "abstained", and 1,955,651 shares were "broker non-votes". 3. The Shareholders approved amendments to the Company's Directors Stock Option Plan which (i) extended the expiration date to make new grants of options under the Directors Plan from February 9, 2000 until February 9, 2005; (ii) increased the total number of shares of the Company's Common Stock available for grant under such plan by 150,000 shares; (iii) granted to each Director, at the time of the 1999 Annual Meeting, an additional option to purchase 10,000 shares of Common Stock, in lieu of the 1,500 shares of Common Stock which would otherwise have been granted in 1999 under the Directors Plan; and (iv) revised the number of shares of Common Stock granted to each Director at the time of each Annual Meeting (other than the 1999 Annual Meeting), from 1,500 shares to 3,000 shares of Common Stock. As to this proposal, 2,785,780 shares voted "for", 638,679 shares voted "against", 758,237 shares "abstained", and 1,955,651 shares were "broker non-votes". 8 9 PART II ITEM 5: MARKET FOR THE REGISTRANTS'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Perceptron's Common Stock is traded on The Nasdaq Stock Market's National Market under the symbol "PRCP". The following table shows the reported high and low sales prices of Perceptron's Common Stock for the calendar year periods indicated:
Period Prices ------ ------ Low High ---------- ---------- 1996 First Quarter................................................... $ 17.75 $ 27.00 Second Quarter.................................................. $ 25.50 $ 39.00 Third Quarter................................................... $ 24.50 $ 37.75 Fourth Quarter.................................................. $ 23.50 $ 37.50 1997 First Quarter................................................... $ 25.25 $ 38.13 Second Quarter.................................................. $ 25.25 $ 30.75 Third Quarter................................................... $ 24.88 $ 34.50 Fourth Quarter.................................................. $ 19.13 $ 30.75 1998 First Quarter................................................... $ 17.75 $ 24.50 Second Quarter.................................................. $ 9.38 $ 20.50 Third Quarter................................................... $ 5.63 $ 11.88 Fourth Quarter.................................................. $ 4.25 $ 11.25 1999 First Quarter................................................... $ 3.53 $ 9.88 Second Quarter.................................................. $ 3.75 $ 6.25 Third Quarter (July 1, 1999 through September 15, 1999)......... $ 3.56 $ 5.75
No cash dividends or distribution on Perceptron's Common Stock have been paid and it is not anticipated that any will be paid in the foreseeable future. In addition, the payment of cash dividends or other distributions is prohibited under the terms of Perceptron's revolving credit agreement with its bank. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources", for a discussion of other restrictions on the payment of dividends. The approximate number of shareholders of record on September 15, 1999, was 279. 9 10 ITEM 6: SELECTED CONSOLIDATED FINANCIAL INFORMATION PERCEPTRON, INC. AND SUBSIDIARIES (In thousands except per share amounts)
Years Ended December 31, Six Months Ended Six Months Ended --------------------------------------------------- Statement of Operations Data(1): June 30, 1999(2) June 30, 1998 1998 1997 1996 1995 1994 -------------- ------------- ---- ---- ---- ---- ---- (unaudited) Net sales $21,256 $18,310 $49,635 $65,102 $58,975 $43,154 $33,224 Gross profit 10,488 9,458 27,193 40,025 35,367 26,184 19,248 Operating income (loss) (6,660) (5,156) (5,776) 14,861 9,306 7,699 6,046 Income (loss) before income taxes (7,349) (4,768) (5,143) 16,009 10,245 8,227 6,179 Net income (loss) (4,860) (3,171) (3,339) 10,806 7,150 8,491 6,179 Net income (loss) per diluted average common share (.59) (.38) (.41) 1.28 .86 1.07 .80 Weighted average common shares outstanding - diluted 8,185 8,250 8,239 8,412 8,309 7,955 7,695 As of December 31, As of As of --------------------------------------------------- Balance Sheet Data: June 30, 1999 June 30, 1998 1998 1997 1996 1995 1994 ------------- ------------- ---- ---- ---- ---- ---- (unaudited) Working capital $34,569 $41,582 $40,094 $45,604 $34,444 $28,119 $19,023 Total assets 61,334 62,030 66,408 68,142 61,456 42,017 25,750 Long-term liabilities 4,265 - 1,040 - - - - Shareholders' equity 48,064 54,124 54,852 57,879 46,447 31,049 20,346
- ------------------------------------------------ 1 No cash dividends have been declared or paid during the periods presented. 2 In 1999, the Company elected to change its reporting period from a calendar year ending December 31 to a fiscal year ending June 30. As a result, 1999 represents a six-month transition period. 10 11 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures and markets information-based measurement and inspection focused solutions for process improvement primarily for the automotive and forest products industries. The Company's current principal products are based upon proprietary three-dimensional image processing and feature extraction software algorithms combined with two distinct three-dimensional object imaging technologies: TriCam(TM) and LASAR(TM). TriCam(TM) technology uses structured laser light triangulation techniques to obtain accurate three-dimensional measurements. TriCam(TM) systems are used to measure formed parts for process control, to provide robot guidance for automated assembly tasks and to perform non-contact alignment functions. TriCam(TM) is also used by the Forest Products business unit to measure three-dimensional shapes of trees, logs, boards and by-products. LASAR(TM) provides accurate three-dimensional measurements of a full scene over a larger field of view than does TriCam(TM). The LASAR(TM) product is used by the Forest Products business unit for the three-dimensional measurement of stems, logs and cants. The Company has two business segments: the Automotive business unit segment and the Forest Products business unit segment. The Company's Automotive business unit has sold its products primarily to North American, European and, to a lesser extent, Asian and South American automobile manufacturers. Historically, sales to automotive customers have typically depended primarily on new model re-tooling programs. Accordingly, sales may vary significantly among customers on a year-to-year and quarter-to-quarter basis. The Company's Forest Products business unit has sold its products primarily to North American sawmills, sawmill machinery manufacturers and systems integrators. On June 24, 1999, the Company elected to change its reporting period from a calendar year ending December 31, to a fiscal year ending June 30. As a result, this Form 10-K represents a transition period report covering the period January 1, 1999 through June 30, 1999. The first full year to be reported on a fiscal year basis will be for the twelve-month period ended June 30, 2000. In October 1998, the Company acquired the assets and ultrasound intellectual property, and assumed certain liabilities, of Sonic Industries, Inc. and Sonic Technologies, Inc. ("Sonic") of Hatboro, Pennsylvania. Sonic designs and markets ultrasound scanning systems, principally for forest product applications. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Overview. The Company reported a net loss of $4.9 million ($0.59 per share) for the six months ended June 30, 1999 compared to a loss of $3.2 million ($0.38 per share) in the same 1998 period. Net sales of $21.3 million for the six months ended June 30, 1999 were up $3.0 million, or 16%, over the comparable 1998 period sales of $18.3 million. Automotive sales accounted for 85% of total sales during the six months ended June 30, 1999 compared to 81% in the same 1998 period. Forest Product sales represented 15% of total sales for 1999 compared to 19% in the six months ended June 30, 1998. Net Domestic sales remained flat at $12.4 million for both the 1999 and 1998 six-month periods ended June 30. Net International sales increased $2.9 million from $5.9 million in the six months ended June 30, 1998 to $8.8 million in the 1999 six-month period. Gross profit as a percent of net sales for the 1999 period was 49.3% compared to 51.7% in 1998 principally reflecting both competitive pricing pressure on the Company's mature product lines and the effect of currency declines principally in the Deutsch mark. Operating expenses were up $2.5 million in the six months ended June 30, 1999 compared to 1998, reflecting higher costs for research and development work on new products, the Company's global marketing initiatives, incremental expenses associated with the ultrasound technology acquisition and certain non-recurring and unusual items for aged accounts receivable primarily related to the Company's Autospect and Trident Systems operations. The six month comparison also reflects reduced net interest income of $417,000 as a result of lower cash balances and higher other expenses of $671,000 for legal fees related to a civil action discussed in Item 3, "Legal Proceedings". Automotive. Sales in the six months ended June 30, 1999 increased $3.2 million, or 22%, to $18.0 million compared to $14.8 million in 1998. P-1000 sales accounted for approximately 60% of net Automotive sales in the 1999 period compared to approximately 51% in the same period of 1998. RGS and NCA systems sales accounted for 18% of net sales in 1999 compared to 32% in 1998. The variance in RGS and NCA sales is a function of the timing of orders by the Company's customers. Other product sales, which during the 1999 six-month period included early sales of the Company's new products (principally the Company's web-based Intelligent Process Network ("IPNet") and the first developmental system to inspect wet film paint thickness), represented 15% of net 1999 Automotive sales as compared to 12% in the six-month 1998 period. Training and service revenues accounted for the remainder of net sales in both years. 11 12 Forest Products. Sales in the six months ended June 30, 1999 were $3.3 million, down $200,000 or 8% from the comparable 1998 period sales of $3.5 million. The lower sales level in the 1999 period reflected postponement of capital purchases in late 1998 by mills affected by the soft dimension lumber market. During the six months ended June 30, 1999, the Company sold its first Lumber Analyzer system, an ultrasound technology product that the Company acquired in the fourth quarter of 1998. Bookings & Backlog. New order bookings for the six months ended June 30, 1999 were $25.6 million compared to $18.8 million in the 1998 period. Automotive bookings totaled $22.6 million in the 1999 period compared to $14.7 million a year ago. The increased Automotive bookings in 1999 is primarily related to orders for the Company's new IPNet product and RGS and NCA systems. Forest Product bookings were $3.0 million in 1999 compared to $4.1 million a year ago. The 1999 period includes a $1.1 million two-year blanket order for the Lumber Analyzer system. The new order bookings net of sales resulted in a backlog at June 30, 1999 of $27.8 million compared to $24.7 million in 1998. The amount of new order bookings and the level of backlog during any particular period is not necessarily indicative of the future operating performance of the Company. Gross Profit. Gross profit was $10.5 million, or 49.3% of sales, in the six months ended June 30, 1999, as compared to $9.5 million, or 51.7% of sales, in the 1998 six months. The percentage decrease reflected both competitive pricing pressure on the Company's mature product lines and the effect of currency declines principally in the Deutsch mark. Selling, General and Administrative Expenses (SG&A). SG&A expenses increased from $9.3 million in the six months ended June 30, 1998 to $10.7 million in the same 1999 period. The increase was due to SG&A costs incurred by the ultrasound division of the Forest Products business unit which were not in the 1998 period, increased personnel and related expenses to support the Company's global marketing activities, and bad debt expenses incurred during 1999. The bad debt expenses incurred in 1999 primarily were for the final resolution of aged accounts receivable primarily related to the Company's Autospect and Trident Systems operations. Engineering, Research and Development Expenses (R&D). Engineering and R&D expenses increased from $5.3 million in the six months ended June 30, 1998 to $6.5 million in the 1999 period. The increase in expenses primarily reflect the Company's continued investments in new product development including engineering costs for ultrasound technology that were not in the 1998 period. The Company began to realize revenue from some of the new products during the six-month period ended June 30, 1999. Other Income and Deductions. Other income and deductions decreased from income of $388,000 in the six months ended June 30, 1998 to deductions of $689,000 in the 1999 period. The $1.1 million net unfavorable change was primarily due to $671,000 of legal expenses related to a civil action for which the Company was awarded a favorable judgement. The Company is in the process of trying to collect on this judgement. The six month comparison was also impacted by reduced interest income from lower cash balances and higher interest expense related to borrowings under the Company's Revolving Credit Agreement and the debt assumed in October 1998 related to the ultrasound technology acquisition. Outlook. Based on the backlog as of June 30, 1999, the current rate of new orders and the prospects for its new products, the Company's near-term sales outlook is good and, as a result, performance over the next several quarters is expected to improve relative to comparable periods one year ago. The foregoing statements contain "forward looking statements" within the meaning of the Securities Exchange Act of 1934. Actual results could differ materially from those in the forward looking statements due to a number of uncertainties, including those described under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement", below. YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net Sales. Net sales of $49.6 million in 1998 decreased by $15.5 million, or 24%, compared with net sales of $65.1 million in 1997. Net Domestic sales decreased from $49.5 million in 1997 to $34.7 million in 1998. Net International sales decreased from $15.6 million in 1997 to $14.9 million in 1998. The total decrease in net sales for 1998 was principally accounted for by a $12.4 million, or 32%, decrease in sales of P-1000 systems and a $3.0 million, or 29%, decrease in sales of RGS and NCA systems. Because the P-1000 system has been widely received, particularly in North America, by the automotive industry for several years, the sales decline for this system was not unexpected. The RGS and NCA systems' decrease was primarily due to the timing of new orders. Forest Products' sales were up slightly compared with 1997. P-1000 systems accounted for 54% of net sales in 1998 and 60% of net sales in 1997. The RGS and NCA systems combined accounted for 15% of net sales in 1998 and 16% in 1997. Forest Products sales accounted for 20% of net sales in 1998 and 15% of net sales in 1997. Training and service revenues and other product sales accounted for the remainder of net sales in both years. New order bookings for 1998 totaled $48.9 million, compared to $66.1 million in 1997. Domestic orders declined from $50.4 million in 1997 to $32.9 million in 1998 while International orders were up from $15.7 million in 1997 to $16.0 million in 1998. 12 13 P-1000 systems accounted for 60% of new order bookings in 1998 and 50% in 1997. RGS and NCA bookings accounted for 6% of bookings in 1998 and 17% in 1997. Forest Product bookings were 20% of the total in 1998 and 19% in 1997. Training and service and other product sales accounted for the remainder of net bookings in both years. The decrease in new order bookings in 1998 compared with 1997 was principally due to RGS and NCA systems and, to a lesser extent, lower orders for P-1000 systems, Forest Product systems, and Autospect paint inspection systems. RGS and, in particular NCA systems, orders were down due to the timing of new blanket purchase orders from several customers. The Forest Product systems' order decline reflected; (1) forest industry cash constraints related to weak demand for lumber and (2) reduced orders for LASAR based systems due to required system reengineering. Autospect paint inspection systems' new orders were lower than anticipated due to delays in new product development. Gross profit. Gross profit was $27.2 million, or 54.8%, of sales in 1998 compared with $40.0 million, or 61.5%, of sales in 1997. The percentage decrease was due primarily to the lower sales volume which led to under-absorbed fixed overhead and, to a lesser extent, sales mix and higher manufacturing, warranty and installation costs. Selling, general and administrative expenses. Selling, general and administrative expenses were $20.1 million, or 40.6%, of sales in 1998 compared with $16.0 million, or 24.5%, of sales in 1997. This increase was due primarily to added personnel and associated expenses, such as travel and telephone, required to support the development of domestic and international markets for Automotive and Forest Products. Incremental cost increases associated with the acquisitions during 1997 and 1998 also contributed to the year over year spending increase. Engineering, research and development. Engineering, research and development expenses increased from $8.9 million, or 13.7% of sales in 1997, to $11.4 million, or 22.9% of sales in 1998. The increase was primarily due to additional personnel as well as higher material and testing expenditures to support products under development. Intangible asset write-off. During 1998, the Company developed a new suite of non-contact three-dimensional measurement technologies, which superceded certain existing technologies recorded as intangible assets. As a result, the carrying value of these intangible assets was evaluated for impairment. This evaluation resulted in a write-off of intangible assets with a net book value of $1.5 million. Interest income, net. Interest income, net, decreased from approximately $0.9 million in 1997 to $0.7 million in 1998, due to lower average cash balances during 1998. YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net Sales The Company's net sales increased by 10% from $59.0 million in 1996 to $65.1 million in 1997. Net Domestic sales increased from $46.1 million in 1996 to $49.5 million in 1997. Net International sales increased from $12.9 million in 1996 to $15.6 million in 1997. The total increase in net sales for 1997 was accounted for by a 5% increase in sales of P-1000 systems, a 45% increase in sales of RGS and NCA systems, and a 21% increase in the sale of Forest Product systems in North America. P-1000 systems accounted for 63% of net sales in 1996 and 60% of net sales in 1997. The RGS and NCA systems combined accounted for 12% of net sales in 1996 and 16% in 1997. Forest Products sales accounted for 13% of net sales in 1996 and 15% of net sales in 1997. Training and service revenues and other product sales accounted for the remainder of net sales in both years. New order bookings for 1996 totaled $64.7 million, compared to $66.1 million in 1997. Domestic orders were up from $49.7 million in 1996 to $50.4 million in 1997 and International orders were up from $15.0 million in 1996 to $15.7 million in 1997. P-1000 systems accounted for 66% of new order bookings in 1996 and 50% in 1997. RGS and NCA bookings accounted for 13% of bookings in 1996 and 17% in 1997. Forest Product bookings were 10% of the total in 1996 and 19% in 1997. Training and service and other product sales accounted for the remainder of net bookings in both years. The increase in new order bookings in 1997 was principally due to Forest Product orders, orders for RGS and NCA systems and orders for Autospect paint inspection products, offset by a decline in P-1000 orders. Gross profit. Gross profit increased from $35.4 million in 1996 to $40.0 million in 1997, and as a percentage of net sales increased from 60.0% in 1996 to 61.5% in 1997. The percentage increase is due primarily to increased sales of higher gross margin products and, to a lesser extent, to the lower gross profit percentage associated with sales by the Company of a new product, which was integrated into equipment acquired from an original equipment manufacturer ("OEM"), and sold as a complete system in 1996. Selling, general and administrative expenses. Selling, general and administrative expenses increased by 4% from $15.4 million in 1996 to $16.0 million in 1997. This increase is due primarily to increases in personnel and various operating expenses required to support the increased 1997 operating activity and, to a lesser extent, to costs associated with the recent 13 14 acquisitions partially offset by decreased management performance bonuses. Additionally, 1996 expenses included a non-recurring charge related to a special compensation program at one of the acquired companies. As a percentage of net sales, selling, general and administrative expenses decreased from 26.1% in 1996 to 24.5% in 1997. Engineering, research and development. Engineering, research and development expenses increased by 23%, from $7.3 million in 1996, to approximately $8.9 million in 1997, due primarily to increased personnel and, to a lesser extent, to increased expenditures for materials associated with products under development. As a percentage of net sales, engineering, research and development expenses increased from 12.4% in 1996 to 13.7% in 1997. Non-cash stock compensation expense. During 1996, some participants in the Company's stock option plan used Perceptron stock options to pay the exercise price of stock options issued under the plan. Accounting rules required the recording of a non-cash compensation expense relating to these exercises. The Company took action to eliminate the provision in its stock option plans which otherwise might have resulted in similar non-cash stock compensation expense in 1997 and future years. Interest income, net. Interest income, net, increased from approximately $0.7 million in 1996 to $0.9 million in 1997, due to increased cash balances and related investing activities during 1997. Income before provision for income taxes. In 1996, Perceptron had income before provision for income taxes of approximately $10.2 million representing 17.4% of net sales, as compared to 1997 income before provision for income taxes of approximately $16.0 million representing 24.6% of net sales. Without the non-cash stock compensation charge, the results for 1996 would have been $13.4 million, or 22.8% of net sales in 1996. Net income. Net income in 1997 was $10.8 million, or 16.6% of net sales, resulting in $1.28 per diluted share. In 1996, net income was $7.2 million, or 12.1% of net sales, resulting in $.86 per diluted share. Excluding the non-cash stock option compensation expense, the 1996 net income would have been $9.2 million, 15.6% of net sales, or $1.11 per diluted share. LIQUIDITY AND CAPITAL RESOURCES FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 The Company's cash and cash equivalents were $4.2 million at June 30, 1999, compared to $5.8 million at December 31, 1998. The decrease of $1.6 million in cash for the six months resulted primarily from $3.4 million used in operations and $1.0 million used for capital spending, offset by $3.0 million of cash provided from financing activities. The use of cash for operations reflected the net loss for the quarter adjusted for non-cash items, offset by reductions in working capital requirements. Receivables decreased $4.3 million as a result of collections and a lower sales level in the first six months of 1999 compared to the last six months of 1998. The increase of $959,000 in inventory primarily represented purchases of component parts needed to fulfill orders. The decrease in accounts payable and other current assets and liabilities totaling $1.2 million primarily reflected the timing of payments and a lower expense level in the second quarter of 1999 compared to the fourth quarter of 1998. Financing activities during the six-month period ended June 30, 1999 reflected net working capital borrowings of $3.2 million. Also in the first quarter of 1999, the Company completed its stock repurchase program with the purchase of 50,000 shares of its common stock for $257,000. The Company may buy shares of its common stock on the open market or in privately negotiated transactions from time to time, based on market prices, to meet the continuing share requirements of the Company's stock-based incentive programs. At June 30, 1999, the Company had a $15.0 million unsecured Revolving Credit Agreement ("Revolver") that expires on May 31, 2001. Proceeds under the Revolver may be used for general corporate purposes and can be designated as a Floating Rate Loan or as a Eurodollar Rate Loan. Interest on Floating Rate borrowings is calculated daily at 1/2% below the bank's prime rate which was 8.25% as of August 31, 1999 and is payable on the last day of each month. Interest on Eurodollar Rate borrowings is calculated at a Eurodollar Rate for the period chosen (approximately 7% as of September 2, 1999) and is payable on the last day of the applicable period. Quarterly, the Company pays a commitment fee of 1/4% per annum on the daily unused portion of the Revolver. The Revolver prohibits the Company from paying dividends. In addition, the Revolver contains various financial covenants that restrict dividend payments by requiring the Company to maintain a Fixed Charge Coverage Ratio and a Total Liabilities to Tangible Net Worth Ratio. Effective June 30, 1999, the Revolver was amended to revise certain of the covenants. The Company had $3.2 million outstanding under the Revolver at June 30, 1999. At June 30, 1999, the Company's principal bank had agreed to provide unsecured bank credit facilities of 1.0 million Deutsch mark and $1.0 million Canadian dollar. These facilities may be used to finance working capital needs and equipment purchases or capital leases. Any borrowings will bear interest at the bank's prime rate (8.25% as of August 31, 1999). The credit facilities expire on May 31, 2000, unless canceled earlier by the Company or the bank. The Company had no borrowings outstanding under these credit facilities at June 30, 1999. 14 15 The Company believes that available cash on hand and existing credit facilities will be sufficient to fund its currently anticipated fiscal year 2000 cash flow requirements. The Company does not believe that inflation has significantly impacted historical operations and does not expect any significant near-term inflationary impact. The Company expects to spend approximately $2.2 million during fiscal year 2000 for capital equipment, although there is no binding commitment to do so. For a discussion of certain contingencies relating to the Company's financial position and results of operations, see Note 10 to the Consolidated Financial Statements, "Contingencies". FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1998 The Company's cash and cash equivalents as of December 31, 1998 were $5.8 million, compared with $14.4 million as of December 31, 1997. The use of cash was due primarily to; (1) $2.6 million for operations after adjusting for non-cash charges, (2) increased inventories of $3.3 million and other working capital needs of $1.1 million, (3) capital spending of $2.4 million, (4) stock repurchase of $1.6 million and (5) the acquisition of Sonic assets for $1.1 million. These cash outflows were partially offset by; (1) the sale of marketable securities of $2.0 million and (2) proceeds from exercises of stock options of $1.2 million. The inventory increase was due primarily to higher levels of work-in-process and finished goods inventories to support future deliveries. The Company repurchased 123,000 shares of its common stock during 1998. Repurchased shares primarily will be used to offset the Company's requirements for share issuances under its various stock-based incentive programs. EURO CONVERSION A single currency called the "euro" was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union agreed to adopt the euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies (the "legacy currencies") and the euro were established as of that date. The legacy currencies are scheduled to remain legal tender as denominations of the euro until at least January 1, 2002 (but not later than July 1, 2002). During this transition period, parties may settle transactions using either the euro or a participating country's legacy currency. Conversion to the euro may reduce the amount of the Company's exposure to changes in foreign exchange rates, due to the netting effect of having assets and liabilities denominated in a single currency as opposed to the various legacy currencies. Conversely, because there will be less diversity in the Company's exposure to foreign currencies, movements in the euro's value in U.S. dollars could have a more pronounced effect, whether positive or negative, on the Company. YEAR 2000 READINESS DISCLOSURE YEAR 2000 OVERVIEW An issue affecting the Company is the potential inability of many computer systems and applications to process information in the year 2000 and beyond. This could result in system failures or miscalculations leading to disruptions in the Company's activities and operations (the "Year 2000" capability issue). Programs that will operate in the Year 2000 unaffected by the change in year from 1999 to 2000 are referred to herein as "Year 2000 compliant". The disclosure below is intended to summarize the Company's actions to minimize the risk. Certain portions of the discussion set forth below contain "forward looking statements" within the meaning of the Securities Exchange Act of 1934, as amended, including, but not limited to, those relating to the compliance of the Company's products and systems to operate under the Year 2000 issue, future costs to remediate Year 2000 issues, the timetable in which such remediation is to occur, the alternatives available to the Company to fully address Year 2000 issues, the Company's requirements and the impact on the Company of an inability of it or its key suppliers and customers to fully address Year 2000 issues. Actual results could differ materially from those in the forward looking statement due to a number of uncertainties set forth below. YEAR 2000 STATE OF READINESS The Company has forward-date tested the current version of its principal products and believes that the current versions, and all versions currently under warranty, are capable of operating in the Year 2000. The Company's products operate on computers and operating systems supplied by third party vendors. The Company's customers have been advised to conduct their own forward-date tests on such systems and to contact the third party vendors regarding available upgrades or other remediation efforts. The Company's principal customers are automotive companies and forest and wood products processors and system integrators who sell to such customers. Because of the size and level of Year 2000 compliance activity by these customers, the Company expects most of these customers will become Year 2000 capable in a timely fashion. However, the Company is 15 16 not monitoring their progress in this regard. If any of the Company's customers are unable to become Year 2000 capable in a timely fashion, it is possible they could suspend product purchases from the Company until their systems have addressed the Year 2000 issue. The Company is in the process of contacting its principal vendors and suppliers (all of which are referred to as "Third Party Suppliers") to determine if they are Year 2000 capable. The Company also intends to order extra material from critical Third Party Suppliers of its product components and parts during the fourth quarter of 1999 to provide buffer stock in the event supply is disrupted. The failure of one or more critical Third Party Suppliers (including utility and similar providers) to be Year 2000 capable such that its supply of needed products or services is interrupted could result in the Company not being able to produce one or more of its systems for a period of time, which in turn could result in lost sales and profits. The Company has established a project team to identify internal systems which are not Year 2000 capable and complete the work required to mitigate the Year 2000 issue. The Company's principal information technology ("IT") systems are located at its headquarters in Plymouth, Michigan. These systems consist of a financial system, which the Company has forward-date tested and believes is Year 2000 capable, and an operations system provided by a third party vendor. Another third party vendor was engaged to make the operating system Year 2000 compliant. The work has been completed and the system tested off-site and found to be compliant. The changes will be implemented and tested live at the Company's headquarters early in the fourth calendar quarter of 1999. The Company also has a number of engineering systems, used primarily for testing, developed by the Company's internal staff. The Company forward-date tested these systems during the first calendar quarter of 1999 and believes it has completed the remediation and testing necessary to make them Year 2000 compliant. The Company's subsidiaries believe that they have completed the modifications and testing necessary to make their IT systems, which are generally small networks of personal computers, Year 2000 compliant. The Company maintains networks of personal computers. Using internal personnel, the Company has assessed its personal computer networks for Year 2000 compliance. Modifications necessary to effect individual personal computer Year 2000 compliance have been completed and modifications required to achieve Year 2000 compliance to certain components of the network are expected to be completed during the fourth calendar quarter of 1999. The Company's personal computer systems generally operate using "shrink-wrapped" software (such as Microsoft Windows 95, Microsoft Word and Excel). To the extent any of the programs used by the personal computer systems are not Year 2000 compliant, the Company believes that Year 2000 capable upgrades are or will be readily available for purchase. A failure of one or more of the Company's internal systems to become Year 2000 compliant, particularly the Company's principal internal information technology systems, could require the Company to manually process information or could prevent or limit access to mission critical information. The Company's non-IT systems consist principally of security, climate control, telephone and data communication systems. The Company has contacted the vendors that support these systems, at the Company's headquarters, each of which believes its system to be Year 2000 compliant. YEAR 2000 COSTS Most of the costs incurred by the Company to date on Year 2000 compliance issues have been internal staff costs and costs relating to normal product upgrades, which the Company has not separately tracked. As a result, the Company is not able to reasonably estimate the amount of such expenditures. The Company presently estimates that its future costs relating to Year 2000 compliance issues, including replacement systems, will be less than $100,000. The Company would have incurred many of the costs for these efforts in any event because of the normal process of product and equipment upgrades. These cost estimates are subject to a number of uncertainties, which could result in actual costs exceeding the estimated amounts described below. Costs related to the Year 2000 issue are funded through operating cash flow. The Year 2000 costs have not caused the Company to defer any other significant information technology programs. YEAR 2000 RISKS AND CONTINGENCY PLANS The Company's Year 2000 project team has evaluated business disruption scenarios, principally related to the Company's internal systems for processing information and the purchase of goods and services to maintain timely production. The team has developed and implemented the plans disclosed previously under "Year 2000 State of Readiness." Estimates of time, costs and risks associated with the Year 2000 issue are based on currently available information. Developments that could affect estimates include, but are not limited to, the availability and cost of trained personnel; the ability to locate and correct all relevant computer code and systems; cooperation and remediation success of the Company's suppliers and customers (and their suppliers and customers); the ability to correctly anticipate risks and implement suitable contingency plans in the event of system failures at the Company or its suppliers or customers (and their suppliers and customers); unanticipated difficulties with the assessment or remediation process resulting in the need to replace more systems or hire more personnel or third party firms to assist in the process than expected and the Company being required to assist any of its Third Party Suppliers to become Year 2000 compliant. 16 17 Some commentators have stated that a significant amount of litigation will arise out of Year 2000 compliance issues. In addition, it is possible that there will be undetected errors or defects associated with Year 2000 date functions in the Company's current products or internal systems or those of its Third Party Suppliers (and their suppliers and customers). Because of the unprecedented nature of litigation in this area, it is uncertain how the Company may be affected by it. In the event of such litigation or the occurrence of production disruptions related to Third Party Suppliers, internal issues, or customers, it is possible the Company's revenues, net income or financial condition could be materially adversely affected. MARKET RISK INFORMATION Perceptron's primary market risk is related to foreign exchange rates. This risk is derived from sales by its international operations, which are primarily located in Germany and The Netherlands and for which products are produced in the U.S. The Company is also subject to interest rate risk in connection with its borrowings. At June 30, 1999, the Company did not have any market risk instruments for trading purposes. FOREIGN CURRENCY RISK The Company has limited foreign currency exchange risk in its international operations due to the percentage of contracts entered into in U.S. dollars and the short time period between sales commitment and delivery for contracts in the non-U.S. currencies. The Company's percentage of sales commitments in U.S. Dollars at June 30, 1999 was 79%. For sales commitments entered into in the non-U.S. currencies, the currency rate risk exposure is predominantly less than one year with the majority in the 120 to 150 day range. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Euro Conversion". The Company may use, from time to time, a limited hedging program to minimize the impact of foreign currency fluctuations. As the Company exports products, it may enter into limited hedging transactions relating to the accounts receivable arising as a result of such shipment. These transactions involve the use of forward contracts. At June 30, 1999, the Company had no forward contracts outstanding. INTEREST RATE RISK The Company is subject to interest rate risk in connection with borrowings under its variable rate revolving line of credit and from fixed rate debt assumed in conjunction with the purchase of ultrasound intellectual property in October 1998. However, this risk is limited due to the limited level of debt the Company has outstanding. The Company's exposure to interest rate risk arises primarily from changes in the prime rate and changes in Eurodollar rates in the London interbank market. See Note 7 of Notes to Consolidated Statements for a description of the Company's outstanding debt. NEW ACCOUNTING PRONOUNCEMENTS In 1999, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed for Internal Use." SOP 98-1 requires the capitalization of internal-use software and specifically identifies which costs should be capitalized and which costs should be expensed. Adoption of this SOP did not have a material effect on the Company's consolidated financial statements. In 1999, the Company adopted SOP 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 generally requires costs of start-up and organizational activities to be expensed as incurred and is effective for fiscal years beginning after December 15, 1998. Adoption of this SOP did not have material effect on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 1999, the FASB delayed the implementation date making the statement effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 requires recognition of all derivative financial instruments as either assets or liabilities in the consolidated balance sheet, measured at fair value and sets forth conditions in which a derivative instrument may be designated as a hedge. The statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings. The Company from time to time engages in hedging activities to minimize the impact of foreign currency fluctuations. Management is currently assessing the effect that this pronouncement may have on the Company's consolidated financial statements. SAFE HARBOR STATEMENT Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operation may be "forward looking statements" within the meaning of the Securities Exchange Act of 1934, including the Company's expectation as to fiscal 2000 and future revenue and earnings levels, the timing of new product releases and the expansion of the 17 18 Company into new markets. Actual results could differ materially from those in the forward looking statements due to a number of uncertainties, including, but not limited to, the dependence of the Company's revenue on a number of sizable orders from a small number of customers, the timing of orders and shipments which can cause the Company to experience significant fluctuations in its quarterly and annual revenue and operating results, timely receipt of required supplies and components which could result in delays in anticipated shipments, general product demand and market acceptance risks, the ability of the Company to successfully compete with alternative and similar technologies, the timing and continuation of the automotive industry's retooling programs, the ability of the Company to resolve technical issues inherent in the development of new products and technologies, the ability of the Company to identify and satisfy market needs, general product development and commercialization difficulties, the quality and cost of competitive products already in existence or developed in the future, the level of interest existing and potential new customers may have in new products and technologies generally, rapid or unexpected technological changes, the impact of undetected errors or defects associated with the Year 2000 date functions on the Company and its suppliers, and the effect of economic conditions, particularly economic conditions in the domestic and worldwide Automotive and Forest Products industries, both of which have from time to time been subject to cyclical downturns due to the level of demand for, or supply of, the products produced by companies in these industries. ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Information required pursuant to this item is incorporated by reference herein from Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Information". ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- Report of Independent Accountants.................................................... 19 Consolidated Financial Statements: Balance Sheets - June 30, 1999, December 31, 1998 and 1997.................. 20 Statements of Income for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996........................ 21 Statements of Cash Flows for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996........................ 22 Statements of Shareholders' Equity for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996.................... 23 Notes to Consolidated Financial Statements.................................. 24
18 19 [PRICEWATERHOUSECOOPERS LETTERHEAD] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Perceptron, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity, and of cash flows present fairly, in all material respects, the financial position of Perceptron, Inc. and its subsidiaries at June 30, 1999, December 31, 1998 and 1997, and the results of their operations and their cash flows for the six months ended June 30, 1999 and for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to in item 14(A)(2) for the six months ended June 30, 1999 and for each of the three years in the period ended December 31, 1998 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Detroit, Michigan August 11, 1999 19 20 PERCEPTRON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, AT JUNE 30, -------------------- (In Thousands) 1999 1998 1997 ----------- -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 4,205 $ 5,753 $ 14,448 Marketable securities - - 2,000 Receivables: Billed receivables, net of allowance for doubtful accounts of $218,000, $200,000 and $175,000, respectively 21,128 27,357 28,000 Unbilled and other receivables 4,611 4,242 2,692 Inventories, net of reserves of $600,000, $519,000 and $860,000, respectively 12,323 11,365 8,019 Prepaid expenses and deferred tax asset 1,307 1,893 708 --------- --------- --------- Total current assets 43,574 50,610 55,867 --------- --------- --------- PROPERTY AND EQUIPMENT Building and land 5,990 5,990 5,982 Machinery and equipment 9,774 8,950 6,638 Furniture and fixtures 1,469 1,438 1,312 --------- --------- --------- 17,233 16,378 13,932 Less - Accumulated depreciation and amortization (6,121) (5,131) (3,308) --------- --------- --------- Net property and equipment 11,112 11,247 10,624 --------- --------- --------- OTHER ASSETS Intangible assets, net of accumulated amortization of $279,000, $94,000 and $394,000, respectively (Note 6) 1,692 1,829 1,651 Deferred tax asset 4,956 2,722 - --------- --------- --------- Total other assets 6,648 4,551 1,651 --------- --------- --------- TOTAL ASSETS $ 61,334 $ 66,408 $ 68,142 ========= ========= ========= LIABILITIES AND COMMON SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,550 $ 3,666 $ 2,979 Accrued liabilities and expenses 4,816 5,726 5,298 Income taxes payable 633 841 631 Accrued compensation and stock option expense 6 283 1,355 --------- --------- --------- Total current liabilities 9,005 10,516 10,263 --------- --------- --------- LONG-TERM LIABILITIES Notes payable (Note 7) 4,265 1,040 - --------- --------- --------- Total long-term liabilities 4,265 1,040 - --------- --------- --------- TOTAL LIABILITIES 13,270 11,556 10,263 --------- --------- --------- SHAREHOLDERS' EQUITY Preferred stock - no par value, authorized 1,000,000 shares, issued none - - - Common stock, $0.01 par value, authorized 19,000,000 shares, issued and outstanding 8,169,000, 8,219,000 and 8,207,000, respectively 82 82 82 Accumulated other comprehensive income (loss) (3,340) (1,669) (2,411) Additional paid-in capital 40,979 41,236 41,666 Retained earnings 10,343 15,203 18,542 --------- --------- --------- Total shareholders' equity 48,064 54,852 57,879 --------- --------- --------- TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 61,334 $ 66,408 $ 68,142 ========= ========= =========
The notes to the consolidated financial statements are an integral part of these statements. 20 21 PERCEPTRON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
TWELVE MONTHS ENDED SIX MONTHS DECEMBER 31, ENDED --------------------------------------- (In Thousands, Except Per Share Amounts) JUNE 30, 1999 1998 1997 1996 ------------- -------- ------- ------- NET SALES $ 21,256 $ 49,635 $65,102 $58,975 COST OF SALES 10,768 22,442 25,077 23,608 -------- -------- ------- ------- GROSS PROFIT 10,488 27,193 40,025 35,367 -------- -------- ------- ------- OPERATING EXPENSES Selling, general and administrative 10,693 20,113 16,220 15,565 Engineering, research and development 6,455 11,384 8,944 7,294 Non-cash intangible asset write-off (Note 6) -- 1,472 -- -- Non-cash stock compensation (Note 12) -- -- -- 3,202 -------- -------- ------- ------- Total operating expenses 17,148 32,969 25,164 26,061 -------- -------- ------- ------- OPERATING INCOME (LOSS) (6,660) (5,776) 14,861 9,306 -------- -------- ------- ------- OTHER INCOME AND (DEDUCTIONS) Foreign currency gain (loss) (18) (23) 257 196 Interest income, net -- 656 891 743 Other (Note 3) (671) -- -- -- -------- -------- ------- ------- Total other income (deductions) (689) 633 1,148 939 -------- -------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES (7,349) (5,143) 16,009 10,245 INCOME TAX EXPENSE (BENEFIT) (2,489) (1,804) 5,203 3,095 -------- -------- ------- ------- NET INCOME (LOSS) $ (4,860) $ (3,339) $10,806 $ 7,150 ======== ======== ======= ======= EARNINGS (LOSS) PER SHARE BASIC $ (0.59) $ (0.41) $ 1.34 $ 0.93 DILUTED $ (0.59) $ (0.41) $ 1.28 $ 0.86 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 8,185 8,239 8,065 7,661 DILUTED 8,185 8,239 8,412 8,309
The notes to the consolidated financial statements are an integral part of these statements. 21 22 PERCEPTRON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED SIX MONTHS DECEMBER 31, ENDED -------------------------------- (In Thousands) JUNE 30, 1999 1998 1997 1996 ------------- -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(4,860) $ (3,339) $ 10,806 $ 7,150 Adjustments to reconcile net income to net cash provided from (used for) operating activities: Depreciation and amortization 1,268 2,488 1,754 904 Deferred income taxes (1,950) (3,190) -- -- Non-cash write-off of intangible asset (Note 6) -- 1,472 -- -- Non-cash stock compensation expense (Note 12) -- -- 167 3,202 Other 18 -- -- 293 Changes in assets and liabilities, exclusive of changes shown separately 2,141 (4,393) (9,417) (9,640) ------- -------- -------- -------- Net cash provided from (used for) operating activities (3,383) (6,962) 3,310 1,909 ------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of short-term debt 8,847 2,000 $ -- 980 Repayment of short-term debt (5,622) (2,000) (980) (200) Repurchase of company stock (257) (1,642) -- -- Proceeds from the exercise of stock options -- 1,212 1,941 2,671 ------- -------- -------- -------- Net cash provided from (used for) financing activities 2,968 (430) 961 3,451 ------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (995) (2,400) (2,356) (5,703) Sales and maturities of marketable securities -- 2,000 500 -- Purchases of marketable securities -- -- -- (2,500) Purchase of Sonic assets (Note 6) -- (1,114) -- -- ------- -------- -------- -------- Net cash (used for) investing activities (995) (1,514) (1,856) (8,203) ------- -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (138) 211 (391) (175) ------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,548) (8,695) 2,024 (3,018) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,753 14,448 12,424 15,442 ------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,205 $ 5,753 $ 14,448 $ 12,424 ======= ======== ======== ======== CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Billed, unbilled and other receivables, net 4,310 $ (667) $ (6,600) $ (9,996) Inventories (959) (3,262) (843) (2,138) Accounts payable (220) 687 (1,913) 588 Other current assets and liabilities (990) (1,151) (61) 1,906 ------- -------- -------- -------- $ 2,141 $ (4,393) $ (9,417) $ (9,640) ======= ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 93 $ 6 $ 31 $ 24 Cash paid during the year for income taxes 322 1,288 2,889 2,711 Non-cash transactions: Previously recorded compensation expense attributable to options exercised -- -- 167 534 Intangible assets acquired by assumption of note payable and for stock, respectively (Note 6) -- 1,040 -- 2,300
The notes to the consolidated financial statements are an integral part of these statements. 22 23 PERCEPTRON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
ACCUMULATED OTHER ADDITIONAL RETAINED TOTAL COMMON STOCK COMPREHENSIVE PAID-IN EARNINGS SHAREHOLDERS' (In Thousands) SHARES AMOUNT INCOME CAPITAL (DEFICIT) EQUITY ------------------------------------------------------------------------------ BALANCES, JANUARY 1, 1996 7,420 $ 74 $ (474) $ 30,863 $ 586 $ 31,049 Comprehensive income Net income 7,150 7,150 Other comprehensive income Foreign currency translation adjustments (455) (455) --------- Total comprehensive income 6,695 --------- Shares issued for intangible assets 82 1 2,299 2,300 Stock options exercised, net of shares tendered 447 5 2,062 2,067 Tax benefit relating to stock option plans 600 600 Previously recorded stock option compensation attributable to options exercised 534 534 Non-cash compensation expense attributable to options exercised 3,202 3,202 ---------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1996 7,949 $ 80 $ (929) $ 39,560 $ 7,736 $ 46,447 ============================================================================ Comprehensive income Net income 10,806 10,806 Other comprehensive income Foreign currency translation adjustments (1,482) (1,482) --------- Total comprehensive income 9,324 --------- Stock options exercised, net of shares tendered 258 2 1,852 1,854 Tax benefit relating to stock option plans 87 87 Previously recorded stock option compensation attributable to options exercised 167 167 ---------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 8,207 $ 82 $ (2,411) $ 41,666 $ 18,542 $ 57,879 ============================================================================ Comprehensive income (loss) Net loss (3,339) (3,339) Other comprehensive income Foreign currency translation adjustments 742 742 --------- Total comprehensive income (loss) (2,597) --------- Stock options exercised, net of shares tendered 135 1 988 989 Tax benefit relating to stock option plans 223 223 Stock repurchased (123) (1) (1,641) (1,642) ---------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 8,219 $ 82 $ (1,669) $ 41,236 $ 15,203 $ 54,852 ============================================================================ Comprehensive income (loss) Net loss (4,860) (4,860) Other comprehensive income Foreign currency translation adjustments (1,671) (1,671) --------- Total comprehensive income (loss) (6,531) --------- Stock repurchased (50) - (257) (257) ---------------------------------------------------------------------------- BALANCES, JUNE 30, 1999 8,169 82 (3,340) 40,979 10,343 $ 48,064 ============================================================================
23 24 PERCEPTRON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Perceptron, Inc. and its wholly-owned subsidiaries (collectively, the "Company") are involved in the design, development, manufacture, and marketing of information-based measurement and inspection focused solutions for process improvements primarily for the automotive and forest products industries. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION On, June 24, 1999, the Company elected to change its reporting period from a calendar year ending December 31, to a fiscal year ending June 30. As a result, the financial statements include the transition period January 1, 1999 through June 30, 1999. The first full year to be reported on a fiscal year basis will be for the twelve-month period ended June 30, 2000. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts for prior periods have been reclassified to conform to the current period presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's wholly-owned foreign subsidiaries have been translated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, with the functional currency being the local currency in the foreign country. Under this standard, translation adjustments are accumulated in a separate component of shareholders' equity. Gains and losses on foreign currency transactions are included in the consolidated statement of income under "Other Income and Deductions". CONCENTRATION OF CREDIT RISK The Company markets and sells its products primarily to automotive assembly companies and to system integrators or original equipment manufacturers ("OEMs"), who in turn sell to automotive assembly companies. The Company also markets and sells its forest products to lumber mills and to OEMs, who in turn, sell to end-users. The Company's accounts receivable are principally from a small number of large customers. The Company performs ongoing credit evaluations of its customers. To date, the Company has not experienced any significant losses related to the collection of accounts receivable. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Fair value approximates carrying value because of the short maturity of the cash equivalents. Those with a greater life are recorded as marketable securities. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS Property and equipment are recorded at cost. Depreciation related to machinery and equipment and furniture and fixtures is primarily computed on a straight-line basis over estimated useful lives ranging from 3 to 10 years. Depreciation on buildings is computed on a straight-line basis over 37 1/2 years. Intangible assets are being amortized generally over 5 years. When assets are retired, the costs of such assets and related accumulated depreciation or amortization are eliminated from the respective accounts, and the resulting gain or loss is reflected in the consolidated statement of income. 24 25 INVENTORIES Inventories are stated at the lower of cost or market. The cost of inventories is determined by the first-in, first-out ("FIFO") method. Inventories, net of reserves, are comprised of the following (in thousands):
AT DECEMBER 31, AT JUNE 30, ----------------------------------- 1999 1998 1997 -------------- ------------- ------------- Component parts $ 6,553 $ 5,794 $ 5,507 Work in process 1,683 2,235 902 Finished goods 4,087 3,336 1,610 -------------- ------------- ------------- Total $ 12,323 $ 11,365 $ 8,019 ============== ============= =============
EARNINGS PER SHARE Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Other obligations, such as stock options and warrants, are considered to be potentially dilutive common shares. Diluted EPS assumes the issuance of potential dilutive common shares outstanding during the period and adjusts for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance unless such effect is anti-dilutive. A reconciliation of both calculations is shown below (in thousands except per share amounts).
NET INCOME WEIGHTED AVG. EARNINGS (LOSS) (LOSS) COMMON SHARES PER SHARE --------------- ---------------- ---------------- SIX MONTHS ENDED JUNE 30, 1999 Basic EPS $ (4,860) 8,185 $ (.59) Effect of dilutive securities: Stock options and warrants - - --------------- ---------------- Diluted EPS $ (4,860) 8,185 $ (.59) ================ ================ YEAR ENDED DECEMBER 31, 1998 Basic EPS $ (3,339) 8,239 $ (.41) Effect of dilutive securities: Stock options and warrants - - --------------- ---------------- Diluted EPS $ (3,339) 8,239 $ (.41) ================ ================ YEAR ENDED DECEMBER 31, 1997 Basic EPS $ 10,806 8,065 $ 1.34 Effect of dilutive securities: Stock options and warrants - 347 --------------- ---------------- Diluted EPS $ 10,806 8,412 $ 1.28 =============== ================ YEAR ENDED DECEMBER 31, 1996 Basic EPS $ 7,150 7,661 $ .93 Effect of dilutive securities: Stock options and warrants - 648 --------------- ---------------- Diluted EPS $ 7,150 8,309 $ .86 =============== ================
Options to purchase 1,188,000 and 914,000 shares of common stock were outstanding in the six months ended June 30, 1999 and year ended December 31, 1998, respectively and were not included in the computation of diluted EPS because the effect would have been antidilutive. REVENUE RECOGNITION The Company's products are generally configured to customer specifications. Certain customers may require a demonstration of the system prior to shipment. At the time of satisfactory demonstration, a written customer acceptance is completed. Revenue is recognized upon the earlier of written customer acceptance or shipment of the product to the customer. RESEARCH AND DEVELOPMENT Research and development costs, including software development costs, are expensed as incurred. 25 26 IMPAIRMENT OF LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE INTANGIBLES The Company evaluates the carrying value of long-lived assets and long-lived assets to be disposed of for potential impairment on an ongoing basis. The Company considers projected future operating results, trends and other circumstances in making such estimates and evaluations. FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, which include cash, marketable securities, accounts receivable, accounts payable, and amounts due to banks or other lenders, approximate their fair values at June 30, 1999, December 31, 1998 and 1997. Fair values have been determined through information obtained from market sources and management estimates. 2. TRANSITION PERIOD COMPARATIVE DATA The following table presents certain financial information for six months ended June 30, 1999 and 1998 (in thousands, except per share amounts):
SIX MONTHS ENDED JUNE 30, ----------------------------------------- 1999 1998 ------------- ------------- (UNAUDITED) Net sales $ 21,256 $ 18,310 Gross profit 10,488 9,458 Income (loss) before income taxes (7,349) (4,768) Income tax expense (benefit) (2,489) (1,597) Net income (loss) (4,860) (3,171) Earnings (loss) per share Basic (.59) (.38) Diluted (.59) (.38) Weighted average common shares outstanding Basic 8,185 8,250 Diluted 8,185 8,250
3. LITIGATION EXPENSES During the six months ended June 30, 1999, the Company expensed $671,000 of legal expenses related to a civil action for which the Company was awarded a favorable judgement (see Note 10). The Company is in the process of trying to collect on this judgement. 4. MARKETABLE SECURITIES The Company had no marketable securities at June 30, 1999. In 1998 and 1997, proceeds from sales of available for sale securities were $2,000,000 and $500,000, respectively; no gross gains or losses were realized on those sales. At December 31, 1997, marketable securities, which were classified as available for sale, consisted of mortgage backed securities whose fair value approximated cost. 5. LEASES The following is a summary, as of June 30, 1999, of the future minimum annual lease payments required under the Company's operating leases having initial or remaining non-cancelable terms in excess of one year (in thousands):
FISCAL YEAR OPERATING ----------- --------- 2000 $ 1,126 2001 962 2002 619 2003 53 2004 27 2005 and beyond 46 ---------- Total minimum lease payments $ 2,833 ==========
Rental expense for operating leases in the six months ended June 30, 1999 and calendar years 1998, 1997 and 1996 was $725,000, $1,318,000, $719,000 and $480,000, respectively. 26 27 6. INTANGIBLE ASSETS In October 1998, the Company purchased the assets, including ultrasound intellectual property, of Sonic Industries, Inc. and Sonic Technologies, Inc. (Sonic) and assumed certain liabilities and long-term debt (see Note 7). Intangible assets, including goodwill, totaled $1,848,000 and are being amortized over five years. During 1998, the Company developed a new suite of non-contact three-dimensional measurement technologies, which superseded certain existing technologies recorded as intangible assets. As a result, the carrying value of these intangible assets were evaluated for impairment. This evaluation resulted in a write-off of intangible assets with a net book value of $1,472,000. In November 1996, the Company's German subsidiary acquired the assets of a division of HGV Vosseler GmbH ("Vosseler"), engaged in the development and sale of non-contact three-dimensional measurement systems for aggregate consideration consisting of 82,150 shares of Common Stock and DM 300,000 and recorded $2.3 million in intangible assets relating to the acquisition. 7. SHORT-TERM AND LONG-TERM NOTES PAYABLE At June 30, 1999, the Company's principal bank had agreed to provide short-term unsecured credit facilities of 1.0 million Deutsch mark and $1.0 million Canadian dollar. The facilities may be used to finance working capital needs and equipment purchases or capital leases. Any borrowings will bear interest at the bank's prime rate (8.25% as of August 31, 1999). The credit facilities expire on May 31, 2000, unless canceled earlier by the Company or the bank. The Company had no borrowings outstanding under these credit facilities at June 30, 1999. In May 1999, the Company entered in to a long-term $15 million unsecured Revolving Credit Agreement (Revolver) that expires on May 31, 2001. Proceeds under the Revolver may be used for general corporate purposes and can be designated as a Floating Rate Loan or as a Eurodollar Rate Loan. Interest on Floating Rate borrowings is calculated daily at 1/2% below the bank's prime rate (8.25% as of August 31, 1999) and is payable on the last day of each month. Interest on Eurodollar Rate borrowings is calculated at a Eurodollar Rate for the period chosen (approximately 7% as of September 2, 1999) and is payable on the last day of the applicable period. Quarterly, the Company pays a commitment fee of 1/4% per annum on the daily unused portion of the Revolver. The Revolver prohibits the Company from paying dividends. In addition, the Revolver contains various financial covenants that, among other things, restrict dividend payments by requiring the Company to maintain a Fixed Charge Coverage Ratio and a Total Liabilities to Tangible Net Worth Ratio and require the Company to maintain certain levels of earnings before interest, depreciation and amortization, and taxes. Effective June 30, 1999, the Revolver was amended to revise certain of the covenants. The Company had $3.2 million outstanding under the Revolver at June 30, 1999. In conjunction with the Company's October 1, 1998 purchase of Sonic assets, discussed in Note 6, the Company assumed a long-term note payable totaling $1,040,000. The note is payable in full on November 1, 2003 and requires quarterly payments of interest at 7.5% per annum on the outstanding principal balance. The note may be prepaid without penalty in whole or in part at anytime. 8. COMMITMENTS AND OTHER As part of the purchase of the Sonic intellectual property (see Note 6), the Company agreed to pay contingent royalty payments on sales using the Sonic technology over a five year period beginning October 1, 1998. The maximum total amount of royalties is capped at $6 million on sales of $90 million. The Company has prepaid approximately $1.9 million of the contingent royalty payments generally through the assumption of liabilities in connection with the acquisition of the Sonic assets. These prepaid royalties generally offset the first contingent royalties due. The Company has received a NIST-ATP award to participate in a joint venture to develop a robot guidance system for powertrain assembly automation. The Company's in-kind development contribution is approximately $500,000 over a four-year period that began in 1998. The joint venture is administered by the National Center for Manufacturing Sciences and includes a major automotive manufacturer. In late 1995, Autospect received a $1.8 million NIST grant that provided funding over three years for development of a system to measure the thickness of wet film (e.g. paint). During 1998, 1997 and 1996, the Company recorded reimbursements of $800,000, $600,000 and $400,000, respectively, which offset the related costs. Prototype testing was completed in 1998 and the system was installed in a manufacturing environment during the first six months of 1999 and is currently being tested. The Company may use, from time to time, a limited hedging program to minimize the impact of foreign currency fluctuations. As the Company exports product, it may enter into limited hedging transactions relating to the accounts receivable arising as 27 28 a result of such shipment. These transactions involve the use of forward contracts. At June 30, 1999, December 31, 1998 and 1997, the Company had no forward contracts outstanding. 9. INFORMATION ABOUT MAJOR CUSTOMERS The Company sells its products directly to both domestic and international automotive assembly companies. During the six months ended June 30, 1999, 25% of net sales were derived from three automotive companies. During 1998, 1997 and 1996, 22%, 38% and 46% of net sales, respectively, were derived from these same three automotive companies. The Company also sells to system integrators or OEMs, who in turn sell to these same automotive companies. For the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996, 8%, 13%, 17% and 16% of net sales, respectively, were to system integrators and OEMs for the benefit of the same three automotive companies. In the six months ended June 30, 1999, the Company had sales to DaimlerChrysler and KUKA Schweissanlagen, each of which exceeded 10% of the Company's total net sales. 10. CONTINGENCIES The Company may, from time to time, be subject to legal proceedings and claims. Litigation involves many uncertainties. Management is currently unaware of any significant pending litigation affecting the Company, other than the matters discussed below. On December 11, 1998, a jury in a civil case in the U.S. District Court for the Eastern District of Michigan returned a favorable judgement for the Company and awarded damages of over $732,000. The suit, filed by the Company in June 1996, charged Sensor Adaptive Machines, Inc. ("SAMI") with violation of a covenant not to compete. SAMI filed counterclaims against the Company alleging, in part, that the Company was engaged in unlawful monopolization and tortious interference with business practice and sought damages. In response to a motion for summary disposition filed by the Company, the counterclaim for unlawful monopolization was dismissed by the court in June 1998. The jury found that the remaining counterclaims were without merit. On March 4, 1999, the Company's motion for interest was granted. SAMI has appealed the judgement including the counterclaims against the Company. On September 25, 1998, the U.S. District Court for the Eastern District of Michigan dismissed, with prejudice, a suit filed against the Company by Speroni, S.p.A. ("Speroni"). Speroni has appealed the dismissal. The suit alleged tortious interference in conjunction with exclusive distributorship contracts covering the sale of P-1000 products in Italy and France between Perceptron B.V., a wholly-owned subsidiary of the Company, and Speroni. Speroni sought unspecified compensatory damages and punitive damages. Perceptron B.V. terminated the exclusive distributorship contracts in 1997 for breach of contract by Speroni and has sought arbitration of this matter with the International Chamber of Commerce International Court of Arbitration ("ICC"), to confirm the terminations and to award damages. Speroni has filed counterclaims with the ICC alleging breach of the exclusive distributorship contracts and seeking damages of $6.5 million. An arbitration hearing has been conducted and Perceptron B.V. is awaiting the decision of the arbitrator. The Company intends to vigorously pursue its claims and defend Speroni's claims. The Company has been informed that certain of its customers have received allegations of possible patent infringement involving processes and methods used in the Company's products. Certain of these customers, including one customer who was a party to a patent infringement suit relating to this matter, have settled such claims. Management believes, however, that the processes used in the Company's products were independently developed without utilizing any previously patented process or technology. Because of the uncertainty surrounding the nature of any possible infringement and the validity of any such claim or any possible customer claim for indemnity relating to claims against these customers, it is not possible to estimate the ultimate effect, if any, of this matter on the Company's financial position. 11. 401(K) PLAN The Company has a 401(k) tax deferred savings plan that covers all eligible employees. The Company may make discretionary contributions to the plan. On January 1, 1998, the Company merged the Autospect and Trident 401(k) plans into the Perceptron 401(k) plan. The Company's contributions to these plans during the six months ended June 30, 1999, and the years 1998, 1997 and 1996, were $218,000, $439,000, $361,000 and $292,000, respectively. 28 29 12. STOCK OPTION PLANS The Company maintains 1992 and 1998 Stock Option Plans covering substantially all company employees and certain other key persons and a Director Stock Option Plan covering all non-employee directors. The 1992 and Director Plans are administered by a committee of the Board of Directors. The 1998 Plan is administered by the President of the Company. Activity under these Plans is shown in the following table:
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------- -------------------- ------------------- ------------------ WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- ------ ----- Shares subject to option Outstanding at beginning of period 1,239,186 $ 19.14 1,088,765 $ 21.39 1,061,511 $ 16.04 1,120,943 $ 8.49 New grants (based on fair value of common stock at dates of grant) 148,200 4.91 397,399 8.72 310,927 27.81 403,800 26.12 Exercised - - (134,931) 7.28 (258,653) 7.92 (430,129) 6.07 Terminated and expired (100,995) 18.28 (112,047) 22.89 (25,020) 16.60 (33,103) 11.72 Outstanding at end of period 1,286,391 17.56 1,239,186 19.14 1,088,765 21.39 1,061,511 16.04 Exercisable at end of period 525,054 22.46 468,824 23.00 313,180 19.04 199,287 10.09
The following table summarizes information about stock options at June 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- -------------------------------- WEIGHTED AVERAGE RANGE OF REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE - ------------------- ---------- ------------------ ----------------- ---------- -------------------- $ 3.81 to $ 6.76 342,388 9.16 years $ 5.829 20,000 $ 5.620 $ 7.40 to $ 21.88 328,581 7.21 years $ 12.346 148,553 $ 14.318 $ 22.55 to $ 25.88 330,508 7.16 years $ 24.251 192,215 $ 23.894 $ 26.25 to $ 36.50 284,914 7.53 years $ 29.898 164,286 $ 30.205 - -------------------- ---------- ------------------ ----------------- ---------- -------------------- $ 3.81 to $ 36.50 1,286,391 7.79 years $ 17.558 525,054 $ 22.463 - -------------------- ---------- ------------------ ----------------- ---------- --------------------
Option prices for options granted under these Plans must not be less than fair market value of the Company's stock on the date of grant. At June 30, 1999, options covering 525,054 shares were exercisable and options covering 875,458 shares were available for future grants under these plans. Options outstanding under the 1992 and 1998 Stock Option Plans generally become exercisable at 25% per year beginning one year after the date of grant and expire ten years after the date of grant. Options outstanding under the Director Stock Option Plan are either an initial option or an annual option. Initial options of 15,000 shares are granted as of the date the non-employee director is first elected to the Board of Directors and become exercisable in full on the first anniversary of the date of grant. Annual options are granted as of the date of the respective annual meeting to each non-employee director serving at least six months prior to the annual meeting and become exercisable in three annual increments of 33 1/3% after the date of grant and expire ten years from the date of grant. In 1999, the Directors Stock Option Plan was amended to increase the amount of the annual options from 1,500 to 3,000 shares of Common Stock for grants beginning in the year 2000 and to grant each Director at the time of the 1999 Annual Meeting, an additional option to purchase 10,000 shares of Common Stock in lieu of the 1,500 shares of Common Stock which would otherwise have been granted. The estimated fair value as of the date options were granted during the six months ended June 30, 1999 and years 1998, 1997 and 1996, using the Black-Scholes option-pricing model was as follows:
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------- ----------------- ----------------- ----------------- Weighted average estimated fair value per share of options granted during the year $ 3.96 $ 5.57 $ 12.82 $ 16.55 Assumptions: Amortized dividend yield - - - - Common stock price volatility 94.17% 73.69% 42.57% 57.94% Risk-free rate of return 6.00% 4.25% 6.20% 5.78% Expected option term (in years) 5 5 5 6
The Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," effective with the 1996 financial statements, but elected to continue to measure compensation cost using the intrinsic value method, in accordance with APB Opinion No. 25 ("APB 25"), "Accounting for 29 30 Stock Issued to Employees." Accordingly, compensation cost for stock options has been recognized under the provisions of APB 25. If compensation cost had been determined based on the estimated fair value of options granted during the six months ended June 30, 1999 and years 1998, 1997 and 1996, consistent with the methodology in SFAS 123, the Company's net income and income per share would have been adjusted to the pro forma amounts indicated below (in thousands except per share amounts):
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------- ----------------- ----------------- ----------------- Net income (loss) As reported $ (4,860) $ (3,339) $ 10,806 $ 7,150 Pro forma $ (6,062) $ (5,377) $ 8,379 $ 4,051 Earnings (loss) per share - diluted As reported $ (.59) $ (.41) $ 1.28 $ .86 Pro forma $ (.74) $ (.65) $ 1.00 $ .49
NON-CASH STOCK COMPENSATION EXPENSE In 1996, some participants in the Company's stock option plan used Perceptron stock options to pay the exercise price of stock options issued under the plan. Accounting rules required the recording of a non-cash compensation expense relating to these option exercises during 1996. 13. INCOME TAXES Income before income taxes for U.S. and foreign operations was as follows (in thousands):
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED ----------------------------------------------------- JUNE 30, 1999 1998 1997 1996 ----------------- ----------- ----------- ----------- U.S. $ (8,289) $ (7,881) $ 9,070 $ 5,884 Foreign 940 2,738 6,939 4,361 ----------- ----------- ----------- ----------- Total $ (7,349) $ (5,143) $ 16,009 $ 10,245 ============ =========== =========== ===========
The income tax provision (benefit) reflected in the statement of income consists of the following (in thousands):
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED ----------------------------------------------------- JUNE 30, 1999 1998 1997 1996 ----------------- ----------- ----------- ----------- Current provision (benefit): U.S. federal $ - $ - $ 2,591 $ 1,184 Foreign 389 1,366 1,227 1,136 Deferred taxes (2,878) (3,170) 1,385 775 ------------ ------------ ----------- ----------- Total provision (benefit) $ (2,489) $ (1,804) $ 5,203 $ 3,095 ============ =========== =========== ===========
The Company's deferred tax assets are substantially represented by the tax benefit of net operating losses and the tax benefit of future deductions represented by reserves for bad debts, warranty expenses and inventory obsolescence. The components of deferred tax assets were as follows (in thousands):
AT DECEMBER 31, AT ----------------------------------------------------- JUNE 30, 1999 1998 1997 1996 ----------------- ----------- ----------- ----------- Minimum tax credits $ - $ - $ - $ 400 Investment tax credits - - - 100 Research activities and general business credits - - - 600 Benefit of net operating losses 4,892 2,202 - - Other, principally reserves 65 175 180 465 ----------- ----------- ----------- ----------- Deferred tax asset $ 4,957 $ 2,377 $ 180 $ 1,565 =========== =========== =========== ===========
30 31
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED ----------------------------------------------------- Rate reconciliation: JUNE 30, 1999 1998 1997 1996 ----------------- ----------- ----------- ----------- Provision at U.S. statutory rate (34.0%) (34.0%) 34.0% 34.0% Recognition of net operating loss carry-forwards and other credits - - - 2.0% Net effect of taxes on foreign activities 0.1% (1.0%) (1.5%) (4.0%) Change in valuation allowance - - - (2.0%) -------------- ----------- ----------- ----------- Effective tax rate (33.9%) (35.0%) 32.5% 30.0% =============== ============ ========== ==========
No provision was made with respect to retained earnings as of June 30, 1999 that have been retained for use by foreign subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liability for the undistributed foreign earnings. At June 30, 1999, the Company had net operating losses for Federal income tax purposes of $4,892,000 that expire in 2019 and 2020. 14. SEGMENT AND GEOGRAPHIC INFORMATION The Company has two reportable segments: Automotive and Forest Products. The Automotive business unit segment designs, manufactures, and markets information-based measurement and inspection focused solutions for process improvements within the automotive industry. The Forest Products business unit segment employs the same technology, providing products and services to the forest products industry. The accounting policies of the segments are the same as those described in the summary of significant policies. The Company evaluates performance based on operating income. The Company primarily accounts for geographic sales and transfers based on cost plus a transfer fee and/or royalty fees and allocates company-wide costs based on revenues and/or labor as appropriate. The Company's reportable segments are strategic business units that offer similar products and services to different industries. They have separate management teams because each business unit requires different marketing strategies. The business units were created as a result of a combination of existing businesses and acquisitions.
REPORTABLE SEGMENTS ($000'S) AUTOMOTIVE FOREST PRODUCTS CONSOLIDATED --------------- ---------------- --------------- SIX MONTHS ENDED JUNE 30, 1999 Net sales $ 17,977 $ 3,279 $ 21,256 Depreciation and amortization 977 296 1,273 Operating (loss) (3,357) (3,303) (6,660) Assets 53,370 7,964 61,334 Capital expenditures 754 241 995 YEAR ENDED DECEMBER 31, 1998 Net sales $ 39,555 $ 10,080 $ 49,635 Depreciation and amortization 2,191 297 2,488 Operating (loss) (4,425) (1,351) (5,776) Assets 58,654 7,754 66,408 Capital expenditures 2,080 320 2,400 YEAR ENDED DECEMBER 31, 1997 Net sales $ 55,472 $ 9,630 $ 65,102 Depreciation and amortization 1,645 109 1,754 Operating income 14,452 409 14,861 Assets 63,785 4,357 68,142 Capital expenditures 2,195 161 2,356 YEAR ENDED DECEMBER 31, 1996 Net sales $ 53,669 $ 5,306 $ 58,975 Depreciation and amortization 804 100 904 Operating income (loss) 10,684 (1,378) 9,306 Assets 59,528 1,928 61,456 Capital expenditures 5,563 140 5,703
31 32 The Company operates in two primary geographic areas: Domestic (United States) and International (primarily Europe, with limited operations in Canada, Asia and South America).
GEOGRAPHIC REGIONS ($000'S) DOMESTIC INTERNATIONAL(1) CONSOLIDATED --------------- ---------------- ---------------- SIX MONTHS ENDED JUNE 30, 1999 Net external sales $ 12,416 $ 8,840 $ 21,256 Operating income (loss) (5,504) (1,156) (6,660) Identifiable assets 42,366 18,968 61,334 YEAR ENDED DECEMBER 31, 1998 Net external sales $ 34,731 $ 14,904 $ 49,635 Operating income (loss) (5,212) (564) (5,776) Identifiable assets 49,080 17,328 66,408 YEAR ENDED DECEMBER 31, 1997 Net external sales $ 49,484 $ 15,618 $ 65,102 Operating income 10,067 4,794 14,861 Identifiable assets 52,897 15,245 68,142 YEAR ENDED DECEMBER 31, 1996 Net external sales $ 46,120 $ 12,855 $ 58,975 Operating income 5,481 3,825 9,306 Identifiable assets 48,725 12,731 61,456
- ------------------------------------------ (1)The Company's German subsidiary had net external sales of $5.8 million, $11.0 million, $10.2 million and $6.7 million in the six months ended June 30, 1999 and years ended December 31, 1998, 1997 and 1996, respectively. Total assets of the Company's German subsidiary were $11.5 million, $10.7 million, $9.6 million and $9.1 million as of June 30, 1999 and December 31, 1998, 1997 and 1996, respectively. 32 33 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected unaudited quarterly financial data for the six months ended June 30, 1999 and for the years ended December 31, 1998 and 1997, are as follows (in thousands, except per share amounts):
QUARTER ENDED ---------------------------------------------------------------- 1999a 3-31 6-30 --------- -------- Net sales $ 8,934 $ 12,322 Gross profit 4,237 6,251 Net income (loss) (2,631) (2,229)b Basic earnings (loss) per share (.32) (.27) Diluted earnings (loss) per share (.32) (.27) 1998 3-31 6-30 9-30 12-31 --------- -------- --------- --------- Net sales $ 8,755 $ 9,555 $ 14,482 $ 16,843 Gross profit 4,439 5,019 8,043 9,692 Net income (loss) (1,664) (1,507) 389 (557)c Basic earnings (loss) per share (.20) (.18) .05 (.07) Diluted earnings (loss) per share (.20) (.18) .05 (.07) 1997 3-31 6-30 9-30 12-31 --------- -------- --------- --------- Net sales $ 12,383 $ 18,806 $ 16,255 $ 17,658 Gross profit 6,930 12,158 10,005 10,932 Net income 911 3,771 2,779 3,345 Basic earnings per share .11 .47 .34 .41 Diluted earnings per share .11 .45 .33 .40
- ------------------------------------------ a In 1999, the Company elected to change its reporting period from a calendar year ending December 31 to a fiscal year ending June 30. As a result, 1999 represents a six-month transition period. b The second quarter of 1999 includes unusual litigation expenses of $671,000 (see Note 3) and bad debt expenses for final resolution of aged accounts receivable primarily related to the Company's Autospect and Trident operations. c In the fourth quarter of 1998, the Company wrote-off $1,472,000 of intangible assets (see Note 6). ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES No response to Item 9 is required. 33 34 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the members of the Board of Directors and executive officers of the Company. The directors shall serve until the fiscal 2000 Annual Meeting of Shareholders or until the election and qualification of their successors or until their resignation or removal. The officers listed below were appointed by the Board of Directors and serve in the capacities indicated. Executive officers are normally appointed annually by the Board of Directors and serve at the pleasure of the Board.
Position, Principal Occupations Name and Age and Other Directorships - -------------------------------- ----------------------------------------------------------------- David J. Beattie, 57............. Mr. Beattie has been a director of the Company since 1997. Mr. Beattie has been Senior Vice President, Sales and Marketing of McNaughton - McKay Electric Company ("MME") since February 1997, where he is responsible for all sales and marketing activities, strategic planning, engineering and related services. In addition, he serves as Chief Operating Officer of MME's Southern Region. He has been employed by MME since 1978 in various capacities including Chief Engineer, Sales Manager and Vice President. MME is a distributor of industrial automation products and services. Mr. Beattie served as a director of Trident Systems, Inc. prior to its acquisition by the Company in April 1997. Philip J. DeCocco, 61............ Mr. DeCocco has been a director of the Company since 1996. Mr. DeCocco has been President of Sturges House, Inc., a company founded by Mr. DeCocco, since 1983. Sturges House, Inc. offers executive recruiting and management consulting services in human resources, strategic planning, executive development and organization design and development to various companies. Robert S. Oswald, 58............. Mr. Oswald has been a director of the Company since 1996. Mr. Oswald has been Chairman, President and Chief Executive Officer of Robert Bosch Corporation, a manufacturer of automotive components and systems, since July 1996 and prior to that time, from January 1994 to June 1996, was President and Chief Executive Officer of such company. Mr. Oswald serves as a director and member of the management board of Robert Bosch, Gmbh and a director of Robert Bosch Corporation. Alfred A. Pease, 53.............. Mr. Pease has been a director of the Company since 1996 and Chairman of the Board since July 1996. Since February 1996, Mr. Pease has been President and Chief Executive Officer of the Company. From November 1993 to February 1996, Mr. Pease was President and founder of Digital Originals, Inc., a manufacturer of digital imaging products and related software. Terryll R. Smith, 49............. Mr. Smith has been a director of the Company since 1996. Mr. Smith served as President and Chief Executive Officer of picoNetworks, an integrated circuits and software services company, from December 1998 to August 1999. From February 1996 to March 1998, Mr. Smith was Group Vice President, Sales and Marketing of Advanced Micro Devices, Inc. ("AMD"), a manufacturer of integrated circuits. From January 1994 to February 1996, Mr. Smith was Group Vice President, Applications Solutions Products of AMD. John J. Garber, 57............... Mr. Garber has been Vice President - Finance and Chief Financial Officer of the Company since February 1999. Prior to that, he was, from September 1991 to February 1999, the Chief Financial Officer of Newcor, Inc., whose principal business is the precision machining of components for the automotive, medium and heavy-duty truck and agricultural industries. Dean J. Massab, 37............... Mr. Massab has been Vice President - Automotive Business Unit of the Company since June 1998. Prior to that, he was Vice President, Marketing and Advanced Business Development from January 1997 until June 1998, and Director of North American Automotive Sales and Support from December 1994 until January 1997. From October 1992 to December 1994, Mr. Massab was the Manager, North American Operations of Schlatter, Inc., a flexible welding systems business.
34 35 Frank H.W. Schoenwitz, 62........ Mr. Schoenwitz has been Vice President - European Business Unit of the Company since February 1998. Prior to that, he was the President and Chief Executive Officer from August 1987 to February 1998 of WELDUN International, a wholly-owned subsidiary of the Robert Bosch Corporation.
ITEM 11: COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS All of the members of the Board of Directors who are not employed by the Company (other than the Chairman of the Board) (the "Eligible Directors") receive an annual retainer of $10,000, paid quarterly in the amount of $2,500. All Eligible Directors who serve on more than one committee of the Board of Directors receive $2,000 for each committee in excess of one on which he serves. All Eligible Directors receive $1,250 for each Board meeting attended. In addition, directors are reimbursed for their out-of-pocket expenses incurred in attending Board and committee meetings. Directors are also eligible to participate in the Company's 1992 Stock Option Plan (the "1992 Plan"). All Eligible Directors participate in the Directors Stock Option Plan (the "Directors Plan"). Any Eligible Director who is first elected or appointed after February 9, 1995 will receive an option to purchase 15,000 shares of Common Stock on the date of his or her election or appointment ("Initial Option"). In addition, each Eligible Director who has been a director for six months before the date of each Annual Meeting of Shareholders held during the term of the Directors Plan automatically will be granted, as of the date of such Annual Meeting, an option to purchase an additional 3,000 shares of Common Stock except in 1999 (an "Annual Option"). In 1999, each Eligible Director received an option to purchase an additional 10,000 shares of Common Stock. The Directors Plan expires on February 9, 2005. The exercise price of options granted under the Directors Plan is equal to the average closing price of the Company's Common Stock as quoted on The Nasdaq Stock Market's National Market for the last five trading days of the month in which the date of grant of the option occurs. Each option granted under the Directors Plan as an Initial Option becomes exercisable in full on the first anniversary of the date of grant. Options granted as Annual Options become exercisable in three annual increments of 33 1/3% of the shares subject to the option. The exercisability of such options is accelerated in the event of the occurrence of certain changes in control of the Company. All options granted under the Plan are exercisable for a period of ten years from the date of grant, unless earlier terminated due to the termination of the Eligible Director's service as a director of the Company. 35 36 EXECUTIVE OFFICERS SUMMARY COMPENSATION TABLE The following table sets forth certain information as to compensation paid by the Company for services rendered in all capacities to the Company and its subsidiaries during the six-month transition period ended June 30, 1999 and fiscal years ended December 31, 1996, 1997, and 1998 to (i) the Company's Chief Executive Officer, and (ii) the Company's executive officers at June 30, 1999 (other than the Chief Executive Officer) whose aggregate annual salary and bonus are expected to exceed $100,000 for the 1999 calendar year. SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards ----------------------------------------------------- ------------ Name and Other Annual All Other Principal Position Year Salary($) Bonus($) Compensation($)(1) Options(#) Compensation($) ------------------ ---- --------- -------- ------------------ ---------- --------------- Alfred A. Pease 1996 175,000 104,778 42,120 (3) 200,000 51,177 (4) President, Chief 1997 214,000 37,878 20,821 (3) 30,000 29,925 (5) Executive Officer 1998 230,000 0 0 -- 6,800 (6) and Chairman of the 1999 115,000 0 0 25,000 5,000 (8) Board (2) John J. Garber 1999 60,615 15,000 (9) 0 35,000 391 (8) Vice President Finance and Chief Financial Officer (9) Dean J. Massab 1998 123,788 0 0 30,000 5,153 (6) Vice President 1999 68,023 0 0 -- 2,825 (8) Automotive Business Unit (10) Frank H. W. Schoenwitz 1998 132,917 25,000 (11) 91,400 (12) 33,000 42,834 (6)(7) Vice President 1999 72,500 0 52,085 (12) -- 7,168 (8) European Business Unit (11)
- -------------------------- (1) Perquisites and other personal benefits were provided to all of the persons named in the Summary Compensation Table. Disclosure of such amounts is not required because such amounts were less than 10% of the total annual salary and bonuses reported for each of the respective individuals for each period presented. (2) Mr. Pease became President and Chief Executive Officer in February 1996 and Chairman of the Board in July 1996. (3) Includes payment of certain tax "gross up" amounts of $42,120 and $20,821 for certain taxable income received by Mr. Pease in 1996 and 1997 as described under "All Other Compensation." (4) "All Other Compensation" includes reimbursements for temporary housing, moving and travel expenses related to Mr. Pease's relocation to Michigan in 1996 totaling $22,925 and reimbursements for closing costs in the amount of $28,252 related to the sale of Mr. Pease's former residence in 1996. (5) "All Other Compensation" includes (i) $23,396 of reimbursements for closing costs relating to Mr. Pease's purchase of a new residence in 1997 following his relocation to Michigan; (ii) $4,750 in contributions made by the Company to Mr. Pease's account under the Company's 401(k) Plan with respect to the fiscal year ended December 31, 1997; and (iii) the dollar value of any life insurance premiums paid by the Company in the fiscal year ended December 31, 1997 with respect to term life insurance for the benefit of Mr. Pease of $1,779. (6) "All Other Compensation" is comprised of (i) $23,396 of reimbursements for closing costs relating to purchase of a new residence in 1997. (ii) $4,750 in contributions made by the Company to Mr. Pease's account under the Company's 401(k) Plan with respect to the fiscal year ended December 31, 1998; and (iii) the dollar value of any life insurance premiums paid by the Company in the fiscal year ended December 31, 1998 with respect to term life insurance for the benefit of the named executives as follows: Mr. Pease of $1,799. 36 37 (7) "All Other Compensation" includes reimbursements for temporary housing, moving and travel expenses related to Mr. Schoenwitz's relocation to Germany and reimbursements for closing costs in 1998 totaling $63,434. (8) "All Other Compensation" is comprised of (i) contributions made by the Company to the accounts of the named executive officers under the Company's 401(k) Plan with respect to the six-month transition period ended June 30, 1999 as follows: Mr. Pease $5,000; and Mr. Massab $2,624; (ii) the dollar value of any life insurance premiums paid by the Company in the six-month transition period ended June 30, 1999 with respect to term life insurance for the benefit of the named executives as follows: Mr. Garber $391; Mr. Massab $201; and Mr. Schoenwitz $2,168; and (iii) reimbursements of moving costs related to Mr. Schoenwitz's relocation to Germany of $5,000. (9) Mr. Garber received a signing bonus when he became Vice President - Finance and Chief Financial Officer in February 1999. (10) Mr. Massab became Vice President - Automotive Business Unit in June 1998. (11) Mr. Schoenwitz received a signing bonus when he became Vice President - European Business Unit in February 1998. (12) Includes payment of certain tax "gross up" amounts of $91,400 and $52,085 for certain taxable income received by Mr. Schoenwitz in 1998 and 1999. GRANTS OF OPTIONS The following table sets forth certain information concerning individual grants of stock options to each of the persons named in the Summary Compensation Table made during the six-month transition period ended June 30, 1999. All grants described in the following table were made under the Company's 1992 Stock Option Plan and contain the Option Acceleration Provision (as defined under "Item 11 -- Compensation of Directors and Officers -- Executive Officers -- Termination of Employment and Change of Control Arrangements"). OPTION GRANTS IN TRANSITION PERIOD
Potential Realizable Value At Assumed Individual Grants Annual Rates of -------------------------------------- Stock Price Number of Percent of Total Appreciation for Securities Options Granted To Exercise or Option Term(3) Underlying Option Employees In Base Price Expiration -------------------- Name Granted(#) Fiscal Year(1) ($/Sh) Date(2) 5%($) 10%($) - ------------------------ ----------------- -------------------- ------ ------- ----- ------ Alfred A. Pease 25,000(4) 35.7 6.20 12/31/08 114,786 274,589 John J. Garber 35,000(5) 50.0 5.24 02/28/09 126,586 310,138 Dean J. Massab 0 0 -- -- -- -- Frank H. W. Schoenwitz 0 0 -- -- -- --
- ------------------------ (1) Options to purchase a total of 70,000 shares of Common Stock were granted to team members in the six-month transition period ended June 30, 1999. (2) Options expire on the date indicated, or, if earlier, one year after the optionee's death or permanent disability or three months after the optionee's termination of employment. (3) Represents the value of such options at the end of its ten year term (without discounting to present value) assuming the market prices of the Common Stock appreciates from the grant date at an annually compounded rate of 5% or 10%. These amounts represent rates of appreciation only. Actual gains, if any, will be dependent on overall market conditions and on the future performance of the Common Stock. There can be no assurance that the amounts reflected in this table will be achieved. (4) Consists of 12,500 of nonqualified options and 12,500 of incentive stock options. Nonqualified options become exercisable in two annual installments of 6,250 shares of Common Stock beginning January 1, 2000. The Incentive Stock Options become exercisable in two annual installments of 6,250 shares of Common Stock beginning on January 1, 2002. (5) Consists of 35,000 of incentive stock options. The Incentive Stock Options become exercisable in four annual installments of 8,750 shares of Common Stock beginning March 1, 2000. 37 38 EXERCISE AND VALUE OF OPTIONS The following table sets forth certain information concerning exercises of stock options during the six-month transition period ended June 30, 1999 by each of the persons named in the Summary Compensation Table and the number of and the value of unexercised stock options held by such persons as of June 30, 1999 on an aggregated basis. AGGREGATED OPTION EXERCISES IN TRANSITION PERIOD AND FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options Shares at Fiscal Year-End(#) at Fiscal Year-End ($)(1) Acquired on Value -------------------------- ------------------------- Name Exercise(#) Realized($)(2) Exercisable Unexercisable Exercisable Unexercisable - ----------------------- ----------- -------------- ----------- ------------- ----------- ------------- Alfred A. Pease ........... 0 0 157,500 97,500 0 0 John J. Garber ........... 0 0 0 35,000 0 0 Dean J. Massab ........... 0 0 14,502 51,998 0 0 Frank H.W. Schoenwitz...... 0 0 7,500 25,500 0 0
- ----------------- (1) Represents the total gain which would have been realized if all such options had been exercised on June 30, 1999. (2) Represents the fair market value of the shares of Common Stock relating to exercised options, as of the date of exercise, less the exercise price of such options. EMPLOYMENT AGREEMENTS Mr. Pease serves in his present capacity pursuant to the terms of an employment agreement. Mr. Pease's agreement provides for an annual base salary of $200,000, subject to increase at the discretion of the Management Development and Compensation Committee ("Management Development Committee"), benefits comparable to the Company's other executive officers, including life, disability and health insurance and the use of a Company leased automobile and an annual performance bonus target level of 60% of his base salary. Mr. Pease's base salary for 1999 is $230,000 and he will receive reimbursement of reasonable monthly club dues. In addition, such agreement provides for the reimbursement of temporary housing, travel and relocation expenses incurred by Mr. Pease, including moving expenses, real estate brokerage commissions and certain closing and loan costs associated with the sale of Mr. Pease's prior residence and purchase of a new residence in the state of Michigan and certain incidental expenses related to the relocation, plus a payment equal to the income taxes payable by Mr. Pease as a result of the receipt of such reimbursements and tax payment. In the event Mr. Pease's employment is terminated without cause, his salary and benefits will continue for twelve months and he will earn a pro rata portion of any bonus that would have been earned in the year of the termination. In the event Mr. Pease's employment is terminated without cause, all remaining unexercisable options for shares of Common Stock granted to him in 1996 will become immediately exercisable. In 1996, Mr. Pease was granted options to purchase 200,000 shares of Common Stock under the 1992 Plan. These options become exercisable in cumulative annual installments of 25% beginning February 14, 1997 and expire on February 14, 2006. TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS Payments due to Mr. Pease upon termination of his employment with the Company are described above under "Item 11 -- Compensation of Directors and Executive Officers -- Executive Officers -- Employment Agreements." Agreements relating to stock options granted under the 1992 Plan to each of the executive officers named in the Summary Compensation Table, as well as certain other officers of the Company, also provide that such options become immediately exercisable in the event that the optionee's employment is terminated without cause, or there is a diminishment of the optionee's responsibilities, following a Change of Control of the Company or, if, in the event of a Change of Control, such options are not assumed by the person surviving the Change of Control or purchasing the assets in the Change of Control. A "Change of Control" is generally defined as a merger of the Company in which the Company is not the survivor, certain share exchange transactions, the sale or transfer of all or substantially all of the assets of the Company, or any person or group of persons (as defined by Section 13(d) the Securities Exchange Act of 1934, as amended) acquires more than 50% of the Common Stock ("Option Acceleration Provision"). 38 39 ITEM 12: SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS PRINCIPAL SHAREHOLDERS The following table sets forth information with respect to beneficial ownership of the Common Stock by each person known by management of the Company to be the beneficial owner of more than five percent of its outstanding Common Stock. The number of shares reported is as of the dates indicated in the footnotes below. The percentage of class is based on 8,169,152 shares of Common Stock outstanding on September 15, 1999. The information as to each person has been furnished by such person and, except as where otherwise indicated, each person has sole voting power and sole investment power with respect to all shares beneficially owned by such person.
Name and Address Amount and Nature of Beneficial Owner of Beneficial Owner Percent of Class - ---------------------------------------------------------- ------------------- ---------------- BankAmerica Corporation, NB Holdings Corporation, NationsBank NA, TradeStreet Investment Associates, Inc. and NationsBanc Advisors Inc. 100 North Tryon St. Charlotte, NC 28255 432,350(1) 5.3 Franklin Resources, Inc., Charles B. Johnson and Rupert H. Johnson, Jr. 777 Mariners Island Boulevard San Mateo, California 94404 911,360(2) 11.2 Royce & Associates, Inc. Royce Management Co. and Charles M. Royce 1414 Avenue of the Americas New York, New York 10019 727,300(3) 8.9 Schwartz Investment Counsel, Inc. and Schwartz Investment Trust 3707 W. Maple Rd. Bloomfield Hills, Michigan 48301 473,800(4) 5.8 T. Rowe Price Associates, Inc., and T. Rowe Price Small-Cap Value Fund, Inc. 100 E. Pratt Street Baltimore, Maryland 21202 650,800(5) 8.0 Wellington Management Company, LLP and Wellington Trust Company, NA 75 State Street Boston, Massachusetts 02109 689,600(6) 8.4
- --------------------- (1) Based upon their statement on Schedule 13G dated on February 4, 1999 and filed with the Securities and Exchange Commission on February 5, 1999, NationsBank NA has sole power to vote and dispose of 53,300 shares of Common Stock and TradeStreet Investment Associates Inc. has sole power to vote and dispose of 379,050 shares of Common Stock. Further, based upon their statement on Schedule 13G, the shares are beneficially owned indirectly by BankAmerica Corporation, a parent holding company of the following: NB Holdings Corporation, which is a holding company of its subsidiaries: NationsBank NA, a bank, and NationsBanc Advisors Inc. and TradeStreet Investment Associates Inc., both registered Investment Advisors. BankAmerica and NB Holdings share the power to vote and dispose of 432,350 shares of Common Stock and NationsBanc Advisors Inc. shares the power to vote and dispose of 234,450 shares of Common Stock. (2) Based upon their statement on Schedule 13G dated January 29, 1999 and filed with the Securities and Exchange Commission on February 2, 1999, Franklin Advisers, Inc. has sole power to vote and dispose of 890,500 shares of Common Stock and Franklin Management, Inc. has sole power to dispose of 20,860 shares of Common Stock. Further, based upon their statement on Schedule 13G, the shares of Common Stock are beneficially owned by one or more open or closed-end investment companies or other managed accounts which are advised by direct and indirect investment advisory subsidiaries (the "Adviser Subsidiaries") of Franklin Resources, Inc. ("FRI"). Such advisory contracts grant to such Adviser Subsidiaries all investment and/or voting power over the securities owned by such advisory clients. Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of the outstanding common stock of FRI and are the principal shareholders of FRI. 39 40 (3) Based upon their statement on Schedule 13G dated on February 8, 1999 and filed with the Securities and Exchange Commission on February 10, 1999, Royce & Associates, Inc. ("Royce") has sole power to vote and dispose of 710,200 shares of Common Stock and Royce Management Company ("RMC") has sole power to vote and dispose of 17,100 shares of Common Stock. Further, based upon their statement on Schedule 13G, Charles M. Royce may be deemed to be a controlling person of Royce and RMC, and as such may be deemed to beneficially own the shares of Common Stock beneficially owned by Royce and RMC. (4) Based upon their statement on Schedule 13G dated and filed with the Securities and Exchange Commission on February 8, 1999, Schwartz Investment Counsel, Inc. has sole power to vote and dispose of 243,500 shares of Common Stock and shared power to vote and dispose of 30,300 shares of Common Stock. Schwartz Investment Trust on behalf of its series fund, Schwartz Value Fund, has sole power to vote and dispose of 200,000 shares of Common Stock. (5) Based upon their statement on Schedule 13G dated and filed with the Securities and Exchange Commission on February 11, 1999, T. Rowe Price Associates, Inc. has sole power to dispose of, and T. Rowe Price Small-Cap Value Fund, Inc. has sole power to vote, 650,800 shares of Common Stock. (6) Based upon its statement on Schedule 13G dated December 31, 1998 and filed with the Securities and Exchange Commission on February 8, 1999, Wellington Management Company, LLP has shared power to vote 168,600 shares and shared power to dispose of 689,600 shares of Common Stock. Further, based upon its statement on Schedule 13G, virtually all of Wellington Management Company's accounts involve outside persons who have the right to receive or direct the receipt of dividends from, or the proceeds from the sale of, securities in such accounts with respect to the Common Stock. However, no such person's rights relate to more than five percent of the Common Stock. BENEFICIAL OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information with respect to beneficial ownership of the Common Stock by each of the directors and director nominees, the persons named in the Summary Compensation Table and by all directors and executive officers as a group as of September 15, 1999, unless otherwise indicated. The information as to each person has been furnished by such person and, except as where otherwise indicated, each person has sole voting power and sole investment power with respect to all shares beneficially owned by such person.
Name and Address Amount and Nature of Beneficial Owner(1) of Beneficial Ownership Percent of Class ---------------------- ----------------------- ---------------- David J. Beattie(2)(3).......................... 15,500 * Philip J. DeCocco(2)(4)......................... 17,000 * Robert S. Oswald (2)(5)......................... 26,500 * Alfred A. Pease (2)(6).......................... 168,900 2.1 Terryll R. Smith (2)(7)......................... 16,500 * Dean J. Massab(8)............................... 22,169 * Frank H.W. Schoenwitz(9)........................ 8,250 * John J. Garber.................................. 2,000 * Directors and executive officers as a group (8 persons)(3)(4)(5)(6)(7)(8)(9)............. 276,819 3.4
- ------------------------------------ * Less than 1% of class (1) The address for Messrs. Beattie, DeCocco, Oswald, Pease, Smith, Massab, Schoenwitz, and Garber is 47827 Halyard Drive, Plymouth, Michigan 48170. (2) Serves as a member of the Board of Directors of the Company. (3) Represents options to purchase 15,500 shares of Common Stock, which are presently exercisable or which are exercisable within 60 days of September 15, 1999. (4) Includes options to purchase 16,500 shares of Common Stock, which are presently exercisable or which are exercisable within 60 days of September 15, 1999. (5) Includes options to purchase 16,500 shares of Common Stock, which are presently exercisable or which are exercisable within 60 days of September 15, 1999. (6) Includes options to purchase 165,000 shares of Common Stock, which are presently exercisable or which are exercisable within 60 days of September 15, 1999. 40 41 (7) Represents options to purchase 16,500 shares of Common Stock, which are presently exercisable or which are exercisable within 60 days of September 15, 1999. (8) Includes options to purchase 22,002 shares of Common Stock, which are presently exercisable or which are exercisable within 60 days of September 15, 1999. (9) Represents options to purchase 8,250 shares of Common Stock, which are presently exercisable or which are exercisable within 60 days of September 15, 1999. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Under the securities laws of the United States, the Company's directors, its executive (and certain other) officers, and any persons holding more than ten percent of the Common Stock are required to report their ownership of the Common Stock and any changes in that ownership to the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Specific due dates for these reports have been established and the Company is required to report in this transition report any failure to file by these dates during the Company's last fiscal year. All of these filing requirements were satisfied by the Company's officers, directors and ten percent shareholders, except that Mr. Garber failed to file on a timely basis one report relating to a single transaction in Common Stock beneficially owned by him. In making these statements, the Company has relied on the written representations of its directors, officers and ten percent shareholders and copies of the reports that have been filed with the Commission. 41 42 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K A. Financial Statements and Schedules Filed 1. Financial Statements - see Item 8 of this report. 2. Financial Statement Schedule - the schedule filed with this report is listed on page 44. 3. Exhibits - the exhibits filed with this report are listed on pages 46 through 49. B. Reports on Form 8-K: The Company's current report on Form 8-K, dated July 6, 1999, which disclosed information under Item 8 concerning the Company's election to change its reporting period from a calendar year ending December 31 to a fiscal year ending June 30. The first full year to be reported on a fiscal year basis will be for the twelve-month period ended June 30, 2000. 42 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Transition Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. PERCEPTRON, INC. (Registrant) By: /S/ Alfred A. Pease ------------------------------------ Alfred A. Pease, Chairman, President and Chief Executive Officer Date: September 24, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /S/ Alfred A. Pease Chairman of the Board, September 24, 1999 - ----------------------------------- President, Chief Executive Officer Alfred A. Pease /S/ John J. Garber Vice President and Chief September 24, 1999 - ----------------------------------- Financial Officer (Principal Financial Officer) John J. Garber /S/ Sylvia M. Smith Controller (Principal Accounting Officer) September 24, 1999 - ----------------------------------- Sylvia M. Smith /S/ David J. Beattie Director September 24, 1999 - ----------------------------------- David J. Beattie /S/ Philip J. DeCocco Director September 24, 1999 - ----------------------------------- Philip J. DeCocco /S/ Robert S. Oswald Director September 24, 1999 - ----------------------------------- Robert S. Oswald /S/ Terryll R. Smith Director September 24, 1999 - ----------------------------------- Terryll R. Smith
43 44 PERCEPTRON, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS SCHEDULE Financial Statements Schedule: Designation Description Page - ----------- ----------- ---- Schedule II Valuation and qualifying accounts 45 The schedules not filed are omitted because they are not required, the information required to be contained therein is disclosed elsewhere in the financial statements or the amounts involved are not sufficient to require submission. 44 45 PERCEPTRON, INC. AND SUBSIDIARIES SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
CHARGED TO BEGINNING COSTS AND ENDING BALANCE EXPENSE CHARGE-OFFS BALANCE ----------- ----------- ----------- ----------- DECEMBER 31, 1996 Allowance for doubtful accounts $ 35,000 $ 84,000 $ 11,000 $ 108,000 Inventory reserves $ 670,000 $ 200,000 $ 10,000 $ 860,000 DECEMBER 31, 1997 Allowance for doubtful accounts $ 108,000 $ 104,000 $ 37,000 $ 175,000 Inventory reserves $ 860,000 $ 0 $ 0 $ 860,000 DECEMBER 31, 1998 Allowance for doubtful accounts $ 175,000 $ 98,000 $ 73,000 $ 200,000 Inventory reserves $ 860,000 $ 47,000 $ 388,000 $ 519,000 JUNE 30, 1999 Allowance for doubtful accounts $ 200,000 $ 458,000 $ 440,000 $ 218,000 Inventory reserves $ 519,000 $ 245,000 $ 164,000 $ 600,000
45 46 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBITS - ----------- ----------------------- 3. Restated Articles of Incorporation and Bylaws. 3.1 Restated Articles of Incorporation, as amended to date, are incorporated herein by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the Quarter Ended March 31, 1998. 3.2 Bylaws, as amended to date, are incorporated herein by reference to Exhibit 19 of the Company's Report on Form 10-Q for the Quarter Ended September 30, 1992. 4. Instruments Defining the Rights of Securities Holders. 4.1 Articles IV, V and VI of the Company's Restated Articles of Incorporation are incorporated herein by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the Quarter Ended March 31, 1998. 4.2 Articles I, II, III, VI, VII, X and XI of the Company's Bylaws are incorporated herein by reference to Exhibit 19 of the Company's Report on Form 10-Q for the Quarter Ended September 30, 1992. 4.3* Credit Agreement, dated May 28, 1999, between Perceptron, Inc. and Bank One, Michigan and First Amendment to Credit Agreement, dated August 24, 1999. Other instruments, notes or extracts from agreements defining the rights of holders of long-term debt of the Company or its subsidiaries have not been filed because (i) in each case the total amount of long-term debt permitted thereunder does not exceed 10% of the Company's consolidated assets, and (ii) the Company hereby agrees that it will furnish such instruments, notes and extracts to the Securities and Exchange Commission upon its request. 4.4 Form of certificate representing Rights (included as Exhibit B to the Rights Agreement filed as Exhibit 4.5) is incorporated herein by reference to Exhibit 2 of the Company's Report on Form 8-K filed March 24, 1998. Pursuant to the Rights Agreement, Rights Certificates will not be mailed until after the earlier of (i) the tenth business day after the Shares Acquisition Date (or, if the tenth day after the Shares Acquisition Date occurs before the Record Date, the close of business on the Record Date) (or, if such Shares Acquisition Date results from the consummation of a Permitted Offer, such later date as may be determined before the Distribution Date, by action of the Board of Directors, with the concurrence of a majority of the Continuing Directors), or (ii) the tenth business day (or such later date as may be determined by the Board of Directors, with the concurrence of a majority of the Continuing Directors, prior to such time as any person becomes an Acquiring Person) after the date of the commencement of, or first public announcement of the intent to commence, a tender or exchange offer by any person or group of affiliated or associated persons (other than the Company or certain entities affiliated with or associated with the Company), other than a tender or exchange offer that is determined before the Distribution Date to be a Permitted Offer, if, upon consummation thereof, such person or group of affiliated or associated persons would be the beneficial owner of 15% or more of such outstanding shares of Common Stock. 4.5 Rights Agreement, dated as of March 24, 1998, between Perceptron, Inc. and American Stock Transfer & Trust Company, as Rights Agent, is incorporated herein by reference to Exhibit 2 of the Company's Report on Form 8-K filed March 24, 1998. 10. Material Contracts. 46 47 10.1 Registration Agreement, dated as of June 13, 1985, as amended, among the Company and the Purchasers identified therein, is incorporated by reference to Exhibit 10.3 of the Company's Form S-1 Registration Statement (amended by Exhibit 10.2) No. 33-47463. 10.2 Patent License Agreement, dated as of August 23, 1990, between the Company and Diffracto Limited, is incorporated herein by reference to Exhibit 10.10 of the Company's Report on Form S-1 Registration Statement No. 33-47463. 10.3 Form of Proprietary Information and Inventions Agreement between the Company and all of the employees of the Company is incorporated herein by reference to Exhibit 10.11 of the Company's Form S-1 Registration Statement No. 33-47463. 10.4 Form of Confidentiality and Non-Disclosure Agreement between the Company and certain vendors and customers of the Company is incorporated herein by reference to Exhibit 10.12 of the Company's Form S-1 Registration Statement No. 33-47463. 10.5 Two Forms of Agreement Not to Compete between the Company and certain officers of the Company, is incorporated herein by reference to Exhibit 10.50 of the Company's Report on Form 10-Q for the Quarter Ended June 30, 1996. 10.6@ Form of Non-Qualified Stock Option Agreements under 1998 Global Team Member Stock Option Plan after September 1, 1998 is incorporated by reference to Exhibit 10.6 of the Company's Report on Form 10-K for the Year Ended December 31, 1998. 10.7@ Amended and Restated 1992 Stock Option Plan is incorporated herein by reference to Exhibit 10.53 of the Company's Report on Form 10-Q for the Quarter Ended September 30, 1996. 10.8@ First Amendment to Amended and Restated 1992 Stock Plan is incorporated by reference to Exhibit 10.39 of the Company's Report on Form 10-Q for the Quarter Ended March 31, 1997. 10.9@ Form of Stock Option Agreements for July 1993 Stock Option Grants is incorporated herein by reference to Exhibit 10.23 of the Company's Report on Form 10-Q for the Quarter Ended September 30, 1993, and Exhibit 10.32 of the Company's Report on Form 10-Q for the Quarter Ended March 31, 1994. 10.10@ Form of Stock Option Agreements for Performance Options is incorporated herein by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the Year Ended December 31, 1993. The performance standards under these options were waived effective March 2, 1994. 10.11@ First Amendments to Stock Option Agreements for Performance Options is incorporated herein by reference to Exhibit 10.20 of the Company's Annual Report on Form 10-K for the Year Ended December 31, 1994. 10.12@ Form of Stock Option Agreements under 1992 Stock Option Plan, (Team Members and Officers) prior to February 9, 1995, is incorporated herein by reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K for the Year Ended December 31, 1993. 10.13@ Forms of Master Amendments to Stock Option Agreements (Team Members and Officers) under 1992 Stock Option Plan, prior to February 9, 1995 is incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1994. 10.14@ Forms of Incentive Stock Option Agreements (Team Members and Officers) under 1992 Stock Option Plan after February 9, 1995 is incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1994. 47 48 10.15@ Forms of Incentive Stock Option Agreements (Team Members and Officers) and Non-Qualified Stock Option Agreements under 1992 Stock Option Plan after January 1, 1997, and Amendments to existing Stock Option Agreements under the 1992 Stock Option Plan is incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996. 10.16@ Incentive Stock Option Agreement, dated February 14, 1996, between the Company and Alfred A. Pease is incorporated by reference to Exhibit 10.29 of the Company's Annual Report on From 10-K for the Year Ended December 31, 1995. 10.17@ Non-Qualified Stock Option Agreement, dated February 14, 1996, between the Company and Alfred A. Pease is incorporated by reference to Exhibit 10.30 of the Company's Annual Report on Form 10-K for the Year Ended December 31, 1995. 10.18@ Amended and Restated Directors Stock Option Plan is incorporated by reference to Exhibit 10.56 to the Company's Report on Form 10-Q for the Quarter Ended September 30, 1996. 10.19@ Form of Non-Qualified Stock Option Agreements and Amendments under the Director Stock Option Plan is incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996. 10.20@ 1998 Global Team Member Stock Option Plan and Form of Non-Qualified Stock Option Agreements under such Plan is incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1997. 10.21@ 1996 Management Bonus Plan is incorporated herein by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996. 10.22@ 1997 Management Bonus Plan is incorporated herein by reference to exhibit 10.23 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1997. 10.23@ Amended and Restated Employee Stock Purchase Plan is incorporated by reference to Exhibit 10.54 of the Company's Report on Form 10-Q for the Quarter Ended September 30, 1996. 10.24@ Letter Agreement, dated February 14, 1996, between the Company and Alfred A. Pease is incorporated herein by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996. 10.25@ Forms of Incentive Stock Option Agreements (Officers) and Non-Qualified Stock Option Agreements (Officers) under 1992 Stock Option Plan after September 1, 1998 is incorporated by reference to Exhibit 10.25 of the Company's Report on Form 10-K for the Year Ended December 31, 1998. 10.26@ Second Amendment to Amended and Restated 1992 Stock Option Plan is incorporated by reference to Exhibit 10.26 of the Company's Report on Form 10-Q for the Quarter Ended March 31, 1999. 10.27@ First Amendment to Amended and Restated Directors Stock Option Plan is incorporated by reference to Exhibit 10.27 of the Company's Report on Form 10-Q for the Quarter Ended March 31, 1999. 10.28*@ First Amendment to the 1998 Global Team Member Stock Option Plan. 10.29*@ Second Amendment to the 1998 Global Team Member Stock Option Plan. 21.* A list of subsidiaries of the Company. 48 49 23.* Consent of Experts. 27.* Financial Data Schedule. - ------------------------------- * Filed with the Company's Annual Report on Form 10-K for the six month transition period ended June 30, 1999. @ Indicates a management contract, compensatory plan or arrangement. 49 50 UNDERTAKING The Company will furnish any exhibit to this report on Form 10-K to a shareholder upon payment of a fee of $.10 per page for photocopying, postage and handling expenses and upon written request made to: Investor Relations Perceptron, Inc. 47827 Halyard Drive Plymouth, MI 48170-2461 50 EX-4.3 2 CREDIT AGREEMENT 1 EXHIBIT 4.3 CREDIT AGREEMENT This Credit Agreement is dated May 28, 1999, and is between PERCEPTRON, INC., a Michigan corporation (the "Borrower"), whose address is 47827 Halyard Drive, Plymouth, Michigan 48170, and BANK ONE, MICHIGAN, a Michigan banking corporation (the "Bank"), whose address is 611 Woodward Avenue, Detroit, Michigan 48226. The parties agree as follows: ARTICLE 1 - DEFINITIONS "Adjusted EBITDA" for any period means EBITDA for such period, plus Rental Expense for such period, minus Capital Expenditures for such period. "Applicable Margin" means the percent per annum added to the Eurodollar Rate if that rate is chosen by the Borrower, and as determined pursuant to Section 2.9 and by reference to the following matrix:
Funded Debt/ Eurodollar EBITDA Rate plus ------ --------- Equal to or greater than 1.50% 1.00 to 1.00 Less than 1.00 to 1.00 1.25%
"Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Rate Loans, a day other than Saturday or Sunday on which the Bank is open for business in Detroit and banks are open for business in New York and on which dealings in United States dollars are carried on in the London interbank market, and (ii) for all other purposes, a day other than Saturday or Sunday on which the Bank is open for business in Detroit. "Capital Expenditures" for any period means capital expenditures of the Borrower and its Subsidiaries for such period, as determined on a consolidated basis in accordance with GAAP. "Commitment" means the obligation of the Bank (a) to make Loans not exceeding $15,000,000 minus any outstanding Letters of Credit, and (b) to issue Letters of Credit not exceeding $1,000,000 so long as the aggregate of the Letters of Credit plus the outstanding balance of Loans does not exceed $15,000,000. 2 "Consolidated" or "consolidated" means, when used with reference to any financial term in this Agreement, the aggregate for two or more persons of the amounts signified by such term for all such Persons determined on a consolidated basis in accordance with GAAP. "Default" means an event described in Section 7. "EBITDA" means, for any period, the operating income (before the deduction of Interest Expense and income tax expense) of the Borrower and its Subsidiaries on a consolidated basis for such period, plus each of the following with respect to the Borrower and its Subsidiaries for such period to the extent utilized in determining such income, without duplication: (i) depreciation and (ii) amortization of deferred costs and other intangibles. "Eurodollar Base Rate" means the rate determined by the Bank to be the rate at which deposits in U.S. dollars are offered to the Bank by first class banks in the London interbank market at approximately 11 a.m. (London time) two Business Days prior to the first day of that Eurodollar Interest Period, in the approximate amount of the relevant Eurodollar Rate Loan and having a maturity approximately equal to that Eurodollar Interest Period. "Eurodollar Interest Period" means a period of one, two or three months commencing on a Business Day selected by the Borrower pursuant to this Agreement. The Eurodollar Interest Period ends on the day which corresponds numerically to that date one, two or three months thereafter. If there is no numerically corresponding day in the next, second or third succeeding month, that Eurodollar Interest Period ends on the last Business Day of the relevant month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, that Eurodollar Interest Period ends on the next succeeding Business Day, unless that Business Day falls in a new month in which case that Eurodollar Interest Period ends on the immediately preceding Business Day. "Eurodollar Rate" means the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to that Eurodollar Interest Period divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to that Eurodollar Interest Period plus (ii) the Applicable Margin per annum. The Eurodollar Rate will be rounded, if necessary, to the next higher 1/16 of 1%. "Fixed Charge Coverage Ratio" means the ratio of Adjusted EBITDA to Fixed Charges. "Fixed Charges" for any period means the sum, without duplication, of the following for such period, determined for the Borrower and its Subsidiaries on a consolidated basis: (i) Interest Expense, plus (ii) Rental Expense, plus (iii) income tax expense, plus (iv) the aggregate amount of all dividends, payments and other distributions (including, without limitation, any such payments and distributions in connection with any redemption, purchase, retirement or other acquisition of the Borrower's capital stock) paid, payable or otherwise accumulating with respect to any class of the Borrower's capital stock, plus (v) all scheduled payments of principal or other sums paid or payable by the Borrower and its Subsidiaries in respect of Funded Debt. "Floating Rate" means a rate per annum equal to the difference of (i) the Prime Rate minus (ii) 1/2% per annum, changing when and as the Prime Rate changes. 2 3 "Funded Debt" of any Person means, without duplication, all indebtedness of such Person to the Bank, all lease obligations of such person which, in accordance with GAAP, are or should be capitalized on the books of such Person, and all other indebtedness of such Person for borrowed money or that otherwise bears interest, other than Subordinated Debt. "GAAP" means, as of the date of determination, generally accepted accounting principles, consistently applied. "Interest Expense" means, for any period and in respect of any Person, the interest expense of such Person in respect of such period, determined in accordance with GAAP. "Interest Period" means a Eurodollar Interest Period. "Lending Installation" means any office, branch, subsidiary or affiliate of the Bank. "Letter of Credit" means a standby letter of credit issued by the Bank for the account of the Borrower, as amended or renewed. "Letter of Credit Documents" means all applications, reimbursement and security agreements given by the Borrower to the Bank in the Bank's standard form for any Letter of Credit, and any amendment or renewal. "Lien" means any security interest, mortgage, pledge, lien, claim, charge, encumbrance, title retention agreement, lessor's interest under a capitalized lease or analogous instrument, in, of or on any Person's assets or properties in favor of any other Person. "Loan" means any loan made (or any conversion or continuation of any loan) by the Bank to the Borrower pursuant to this Agreement and the Note. "Material Adverse Effect" means with respect to any matter that matter (i) could reasonably be expected to materially and adversely affect the business, properties, condition (financial or otherwise), or results of operations of the Borrower and its Subsidiaries, taken as a whole, or (ii) has been brought by or before any court or arbitrator or any governmental body, agency or official, and draws into question the validity or enforceability of any material provision of this Agreement, the Note or any of the Letter of Credit Documents. "Note" means a promissory note in substantially the form of Exhibit A, duly executed and delivered to the Bank by the Borrower, including any amendment or replacement. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Note, all accrued and unpaid facility fees, all outstanding Letters of Credit, and all other obligations of the Borrower to the Bank arising under this Agreement, the Note, and the Letter of Credit Documents. "Person" means any corporation, natural person, firm, limited liability company, joint venture, partnership, trust, unincorporated organization, enterprise, government or any department or agency of any government. 3 4 "Prime Rate" means the rate per annum equal to the prime rate of interest announced by the Bank from time to time, changing when and as the prime rate changes. "Rate Option" means the Eurodollar Rate or the Floating Rate. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System from time to time in effect and includes any successor or other regulation or official interpretation of the Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Rental Expense" for any period means the maximum amount of all rents and other payments (exclusive of property taxes, property and liability insurance premiums and maintenance costs) paid or required to be paid by the Borrower during such period under any operating lease in respect of which the Borrower is obligated as a lessee or user. "Reserve Requirement" means with respect to a Eurodollar Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "Revolving Credit Termination Date" means May 31, 2001. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Subordinated Debt" means all debt, obligations and liabilities of the Borrower to any Person other than the Bank which has been subordinated to the Obligations pursuant to a subordination agreement reasonably satisfactory in form and content to the Bank. "Subsidiary" means any Person more than 50% of the outstanding voting securities or other voting interests of which are at the time owned or controlled, directly or indirectly, by the Borrower or by one or more Subsidiaries or by the Borrower and one or more Subsidiaries, or any similar business organization which is so owned or controlled. "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Year 2000 Issues" means anticipated costs, problems and uncertainties associated with the inability of certain computer applications to effectively handle data including dates on and after January 1, 2000, as such inability affects the business, operations, and financial condition of the Borrower and of the Borrower's material customers, suppliers and vendors. The foregoing definitions are applicable to both the singular and plural forms of the defined terms. Any accounting terms used but not otherwise defined have the meanings given them under GAAP. 4 5 ARTICLE 2 - THE LOANS 2.1 COMMITMENT TO LEND. From and including the date of this Agreement and prior to the Revolving Credit Termination Date, the Bank agrees, on the terms of this Agreement: A) to make Loans to the Borrower from time to time in amounts not exceeding, in the aggregate at any one time outstanding, the amount of the Commitment as it is reduced from time to time by outstanding Letters of Credit. B) to issue Letters of Credit as requested by the Borrower in amounts not exceeding the portion of the Commitment allocated to Letters of Credit as it may be reduced by Loans and Letters of Credit then outstanding. Notwithstanding anything in this Agreement to the contrary, the Bank may decline to issue any requested Letter of Credit on the basis that the beneficiary, the purpose of issuance or the terms or the conditions of drawing are unacceptable to it in its reasonable discretion. 2.2 FEES AND REDUCTION OF THE COMMITMENT. The Borrower agrees to pay to the Bank a facility fee in the amount of $20,000 for this Agreement ($10,000 of which has been received by the Bank, shall be deemed earned by the Bank and is non-refundable), and a commitment fee of 1/4% per annum on the daily unused amount of the Commitment from the date of this Agreement to and including the Revolving Credit Termination Date, payable on the last day of each quarter and on the Revolving Credit Termination Date. The Borrower may permanently reduce the Commitment in whole, or in part in integral multiples of $100,000, upon at least ten Business Days' written notice to the Bank, which must specify the amount of any reduction, but the amount of the Commitment may not be reduced below the outstanding principal amount of the Loans and Letters of Credit. All accrued commitment fees are payable on the effective date of any termination of the obligations of the Bank to make Loans. 2.3 LOANS. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Revolving Credit Termination Date. The Loans may be Floating Rate Loans or Eurodollar Rate Loans, or a combination of them, selected by the Borrower in accordance with Section 2.4. The Loans must be repaid in full on the Revolving Credit Termination Date. The Bank may book the Loans at any Lending Installation. The Borrower may from time to time prepay outstanding Floating Rate Loans in whole or in part without penalty or premium. A Eurodollar Rate Loan may not be paid prior to the last day of the applicable Interest Period. 2.4 METHOD OF SELECTING RATE OPTIONS AND INTEREST PERIODS. The Borrower may select the Rate Option and Interest Period applicable to each Loan from time to time. The Borrower must give the Bank an irrevocable borrowing notice not later than 3:30 p.m. Detroit time on the borrowing date of each Floating Rate Loan and 10:00 a.m. Detroit time three Business Days before the borrowing date for each Eurodollar Rate Loan, specifying: (I) the borrowing date of that Loan, which must be a Business Day, (II) the amount of that Loan, 5 6 (III) the Rate Option selected for that Loan, and (IV) in the case of each Eurodollar Rate Loan, the Interest Period applicable to it. Each Eurodollar Rate Loan will bear interest on the outstanding principal amount for each day during the Interest Period applicable to it from and including the first day of that Interest Period to (but not including) the last day of that Interest Period at the interest rate determined as applicable to that Eurodollar Rate Loan. If at the end of an Interest Period for an outstanding Eurodollar Rate Loan, the Borrower has failed to select a new Rate Option or to pay that Loan, then that Loan will be converted to a Floating Rate Loan on and after the last day of the Interest Period until paid or until the effective date of a new Rate Option with respect to it is selected by the Borrower. An outstanding Floating Rate Loan may be converted to a Eurodollar Rate Loan at any time subject to the notice provisions applicable to the type of Loan selected. The Borrower may not select a Eurodollar Rate for a Loan if there exists a Default or Unmatured Default. The Borrower may not select an Interest Period which would end after the Revolving Credit Termination Date. Each Eurodollar Rate Loan must be in the minimum amount of $1,000,000 (and in multiples of $100,000 if in excess of the minimum). 2.5 RATES APPLICABLE AFTER DEFAULT. If any Loan is not paid at maturity, whether by acceleration or otherwise, (i) each Eurodollar Rate Loan will bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to that Interest Period plus 3% per annum, and (ii) each Floating Rate Loan will bear interest at a rate per annum equal to the Floating Rate otherwise applicable to the Floating Rate Loan plus 3% per annum. During the continuance of any other Default, the Bank may, at its option, by notice to the Borrower, declare that (a) each Eurodollar Rate Loan will bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to that Interest Period plus 3% per annum, and (b) each Floating Rate Loan will bear interest at a rate per annum equal to the Floating Rate otherwise applicable to the Floating Rate Loan plus 3% per annum. 2.6 METHOD OF PAYMENT. All payments of principal, interest, and fees must be made in immediately available funds to the Bank at the Bank's address specified pursuant to Section 9.5, or at any other Lending Installation of the Bank specified in writing by the Bank to the Borrower, by noon (local time) on the date when due. The Bank is authorized to charge the account of the Borrower maintained with it for each payment of principal, interest and fees as it becomes due. 2.7 NOTE; TELEPHONIC NOTICES. The Bank is authorized to record on its books the date, amount, Rate Option and Interest Period of each Loan, and the date and amount of each principal payment made under the Note. These records govern absent manifest error, provided that neither the failure to record nor any error in that record affects the Borrower's obligations under the Note. The Borrower authorizes the Bank to extend Loans and effect Rate Option selections based on telephonic notices made by any person or persons the Bank in good faith believes to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the Bank a written confirmation, if that confirmation is requested by the Bank, of each telephonic notice, signed by an authorized officer of the Borrower. If the written confirmation differs in any material respect from the action taken by the Bank, the records of the Bank govern, absent manifest error. 6 7 2.8 INTEREST PAYMENT DATES; INTEREST BASIS. Interest accrued on the Loans is payable (i) for Floating Rate Loans, on the last day of each month, (ii) for Eurodollar Rate Loans, on the last day of its applicable Interest Period and (iii) for all Loans, on any date on which the Loan is paid or prepaid, whether due to acceleration or otherwise. Interest accrued on each Eurodollar Rate Loan, if any, having an Interest Period longer than three months is also payable on the last day of each three-month interval during that Interest Period. Interest and commitment fees are calculated for actual days elapsed on the basis of a 360-day year. Interest is payable for the day a Loan is made but not for the day of any payment on the amount paid if payment is received prior to noon (local time) at the place of payment. If any payment of principal of or interest on a Loan becomes due on a day which is not a Business Day, that payment must be made on the next succeeding Business Day and, in the case of a principal payment, that extension of time is included in computing interest. 2.9 APPLICABLE MARGIN ADJUSTMENTS. The Applicable Margin is determined based on the ratio (the "Ratio") of (i) the Funded Debt of the Borrower as of each fiscal quarter end (each a "Determination Date") to (ii) the EBITDA of the Borrower for the four consecutive fiscal quarters then ending, and the pricing matrix in the definition of Applicable Margin. Each determination and adjustment will only be applied prospectively, and is made irrespective of any other interest rate adjustment. Each adjustment, if any, of the Applicable Margin based upon the Ratio as of each Determination Date shall be made as of the first day of the second calendar quarter following such Determination Date. Without limiting any of the other rights and remedies of the Bank under this Agreement, in the event the Borrower shall fail to deliver the financial statements required under Section 6.1 when required for any Determination Date, the Applicable Margin shall be adjusted to, or remain at, as the case may be, the highest level set forth in the definition of the term "Applicable Margin" until such time as such financial statements are so delivered and demonstrate that the Applicable Margin should be set at a different level in accordance with such definition and this Section 2.9. 2.10 LETTERS OF CREDIT. Subject to the terms of this Agreement, the Borrower may request Letters of Credit at any time prior to the Revolving Credit Termination Date. Each request must be in the form of the Letter of Credit Documents. Each Letter of Credit must expire on the earlier of the Revolving Credit Termination Date or twelve months after its issuance date. 2.11 LETTER OF CREDIT COMMISSIONS. Each Letter of Credit is subject to a commission in the amount equal to the greater of $250 or 1% per annum of the face amount plus the costs of issuance. ARTICLE 3 - CHANGE IN CIRCUMSTANCES 3.1 YIELD PROTECTION. If any change after the date of this Agreement (whether or not now contemplated) in any law or governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or change after the date of this Agreement (whether or not now contemplated) in any interpretation of them, or compliance by the Bank with any of them after any such change becomes effective, 7 8 (I) subjects the Bank or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding taxation of the overall net income of the Bank or applicable Lending Installation), or changes the basis of taxation of payments to the Bank in respect of its Loans or other amounts due to it under this Agreement, or (II) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Rate Loans), or (III) imposes any other condition the result of which is to increase the cost to the Bank or any applicable Lending Installation of making, funding or maintaining loans or reduces any amount receivable by the Bank or any applicable Lending Installation in connection with loans, or requires the Bank or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount deemed material by the Bank, or (IV) affects the amount of capital required or expected to be maintained by the Bank or any Lending Installation or any corporation controlling the Bank, and the Bank determines the amount of capital required is increased by or based on the existence of this Agreement or its obligation to make Loans under this Agreement or of commitments of this type, then, within 15 days of the Bank's demand, the Borrower must pay the Bank that portion of the increased expense incurred (including, in the case of Section 3.1(iv), any reduction in the rate of return on capital to an amount below that which it could have achieved but for the law, rule, regulation, policy, guideline or directive, and after taking into account the Bank's policies as to capital adequacy) or reduction in amounts received which the Bank determines is attributable to making, funding and maintaining its Loans and its Commitment (after taking into account the Bank's policies with respect to capital adequacy). The Bank represents that it does not know of any amount that would be payable under this Section 3.1 as of the date of this Agreement, although there may be current laws or regulations that may cause an amount to be payable hereunder after the date of this Agreement. The Bank will not assess amounts under this Section 3.1 unless the Bank is generally charging such amounts to the majority of its similarly situated customers. 3.2 AVAILABILITY OF RATE OPTIONS. If the Bank determines that maintenance of its Eurodollar Rate Loans at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, or if the Bank determines that (i) deposits of a type and maturity appropriate to match fund Eurodollar Rate Loans are not available to it, or (ii) a Rate Option does not accurately reflect the cost of making or maintaining a Loan at that Rate Option, then the Bank may suspend the availability of the affected Rate Option (other than the Floating Rate) and require any Eurodollar Rate Loans outstanding under an affected Rate Option to be repaid or converted to an unaffected Rate Option. 8 9 3.3 FUNDING INDEMNIFICATION. If any payment of a Eurodollar Rate Loan occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Rate Loan is not made on the date specified by the Borrower for any reason other than default by the Bank, the Borrower indemnifies the Bank for any loss or cost incurred by it resulting from these facts, including without limitation any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Rate Loan. 3.4 BANK STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably possible, the Bank will designate an alternate Lending Installation with respect to Eurodollar Rate Loans to reduce any liability of the Borrower to the Bank under Section 3.1 or to avoid the unavailability of a Rate Option under Section 3.2, so long as that designation is not disadvantageous to the Bank. The Bank will deliver a written statement as to the amount due, if any, under Section 3.1 or 3.3. That written statement will set forth in reasonable detail the calculations upon which the Bank determined the amount, and is final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under those Sections in connection with a Eurodollar Rate Loan will be calculated as though the Bank funded its Eurodollar Rate Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to that Loan, whether in fact that is the case or not. Unless otherwise provided in this Agreement, the amount specified in the written statement is payable on demand after receipt by the Borrower of the written statement. The obligations of the Borrower under Sections 3.1 and 3.3 survive payment of the Obligations and termination of this Agreement. ARTICLE 4 - CONDITIONS PRECEDENT 4.1 INITIAL LOAN OR LETTER OF CREDIT. The Bank is not required to make the initial Loan or issue the initial Letter of Credit under this Agreement unless the Borrower has furnished to the Bank whatever opinions of counsel, certificates of incumbency, resolutions, bylaws and articles of incorporation which the Bank reasonably requests, and, if requested by the Bank, information satisfactory to the Bank regarding the Borrower's plan for addressing Year 2000 Issues. 4.2 EACH LOAN. The Bank is not required to make any Loan or issue any Letter of Credit, unless on the applicable borrowing date (i) there exists no Default or Unmatured Default, (ii) the warranties contained in Article 5 are true and correct as of such borrowing date, and (iii) all legal matters incident to making the Loan or issuing the Letter of Credit, as the case may be, including without limitation executed and delivered Letter of Credit Documents, are reasonably satisfactory to the Bank and its counsel. 9 10 ARTICLE 5 - WARRANTIES The Borrower warrants to the Bank that: 5.1 CORPORATE EXISTENCE AND STANDING. Each of the Borrower and the Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted except where the failure to have that authority would not have a Material Adverse Effect. 5.2 AUTHORIZATION AND VALIDITY. The Borrower has the corporate power and authority and legal right to execute and deliver this Agreement and the Note and to perform its obligations under them. The execution and delivery by the Borrower of this Agreement and the Note and the performance of its obligations under them have been duly authorized by proper corporate proceedings, and this Agreement and the Note each constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5.3 NO CONFLICT; GOVERNMENT CONSENT. Neither the execution and delivery by the Borrower of this Agreement and the Note, nor the consummation of the transactions described in them, nor compliance with their provisions will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any Subsidiary, or the Borrower's or any Subsidiary's articles of incorporation or bylaws, or the provisions of any indenture, instrument or agreement to which the Borrower or any Subsidiary is a party or is subject, or by which it or its property is bound, or conflict with or constitute a default under any indenture, instrument or agreement, or result in the creation or imposition of any Lien in, of or on the property of the Borrower or a Subsidiary pursuant to the terms of any indenture, instrument or agreement. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of, any governmental or public body or authority, or any subdivision of them, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, this Agreement or the Note. 5.4 FINANCIAL STATEMENTS. The December 31, 1998 consolidated financial statements of the Borrower and the Subsidiaries previously delivered to the Bank were prepared in accordance with GAAP in effect on the date those statements were prepared and fairly present the consolidated financial condition and operations of the Borrower and the Subsidiaries at that date and the consolidated results of their operations for the period then ended. 5.5 MATERIAL ADVERSE CHANGE. Since December 31, 1998, there has been no material adverse change in the business, properties, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries, taken as a whole. 5.6 LITIGATION AND CONTINGENT OBLIGATIONS. Except as disclosed on Schedule 5.6 attached to this Agreement, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any Subsidiary which is reasonably likely to have a Material Adverse Effect. The 10 11 Borrower has no material contingent obligations not provided for or disclosed in the financial statements referred to in Section 5.4. 5.7 REGULATION U. Margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) constitutes less than 25% of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction under this Agreement. 5.8 COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries have complied in all material respects with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency of them, having jurisdiction over the conduct of their respective businesses or the ownership of their respective properties, except to the extent that the failure to so qualify would not have a Material Adverse Effect. ARTICLE 6 - COVENANTS During the term of this Agreement, unless the Bank otherwise consents in writing: 6.1 FINANCIAL REPORTING. The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with GAAP, and furnish to the Bank: (I) Within 90 days after the close of each of its fiscal years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in GAAP and required or approved by the Borrower's independent certified public accountants) audit report certified by independent certified public accountants, reasonably acceptable to the Bank, prepared in accordance with GAAP on a consolidated basis for itself and the Subsidiaries, including a consolidated balance sheet as of the end of that period, related consolidated statements of income and retained earnings, and a consolidated statement of cash flows, together with the related consolidating worksheets for the income statement and balance sheet certified by the chief financial officer of the Borrower, and a certificate, in form and substance reasonably satisfactory to the Bank, of the chief financial officer of the Borrower to the effect that a computation (which computation shall accompany such certificate and shall be in form and substance reasonably satisfactory to the Bank) showing compliance with Sections 6.12, 6.13 and 6.14 is in conformity with the requirements of this Agreement. (II) Within 60 days after the close of the first three quarterly periods of each of its fiscal years, for itself and the Subsidiaries, a consolidated unaudited balance sheet as of the close of each such period and consolidated statements of income and cash flows for the period from the beginning of that fiscal year to the end of that quarter, all certified by the chief financial officer of the Borrower, together with the related consolidating worksheets for the income statement and balance sheet certified by the chief financial officer of the Borrower, and a certificate, in form and substance satisfactory to the Bank, of the chief financial officer of the Borrower to the effect that a computation (which computation shall accompany such certificate and shall be in form and substance reasonably satisfactory to the Bank) showing compliance with Sections 6.12, 6.13 and 6.14 is in conformity with the requirements of this Agreement. 11 12 (III) Promptly upon furnishing it to its shareholders, copies of all financial statements, reports and proxy statements so furnished. (IV) Promptly upon filing them, copies of all registration statements and annual, quarterly, monthly or other regular reports which the Borrower or any Subsidiary files with the Securities and Exchange Commission. (V) Any other information (including non-financial information) which the Bank or any Lending Installation from time to time reasonably requests. 6.2 USE OF PROCEEDS. The Borrower will, and will cause each Subsidiary to, use the Letters of Credit and proceeds of the Loans for general corporate purposes. The Borrower may not, nor may it permit any Subsidiary to, use any of the Letters of Credit or proceeds of the Loans to purchase or carry any "margin stock" (as defined in Regulation U). 6.3 CONDUCT OF BUSINESS. The Borrower will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted, and do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except that, without limiting the requirements of Section 6.15, the Borrower may dissolve or otherwise terminate the separate existence of a Subsidiary if that dissolution or termination would not have a Material Adverse Effect. 6.4 TAXES. The Borrower will, and will cause each Subsidiary to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law, and pay when due all taxes, assessments and governmental charges and levies on it or its income, profits or property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. 6.5 COMPLIANCE WITH LAWS. The Borrower will, and will cause each Subsidiary to, comply in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except to the extent such noncompliance would not have a Material Adverse Effect. 6.6 MERGER. The Borrower will not merge or consolidate with or into any other Person unless the Borrower is the legally surviving corporation and, after giving effect to the merger or consolidation, no Default or Unmatured Default exists. 6.7 LIENS. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the property of the Borrower or any Subsidiary, except: (I) Liens for taxes, assessments or governmental charges or levies on its property if they are not at the time delinquent or if they can be paid later without penalty, or are being contested in good faith and by appropriate proceedings. 12 13 (II) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been set aside on its books. (III) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. (IV) Good faith deposits in connection with bids, tenders, contracts or leases to which the Borrower or any of its Subsidiaries is a party for a purpose other than borrowing money or obtaining credit, including rent security deposits. (V) Pledges or deposits to secure public or statutory obligations of the Borrower or any of its Subsidiaries, or surety, customs or appeal bonds to which the Borrower or any of its Subsidiaries is a party. (VI) Liens affecting real property which constitute minor survey exceptions or defects or irregularities in title, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of such real property, provided that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said properties or materially impair their use in the operation of the businesses of the Borrower or any of its Subsidiaries. (VII) Any Lien created to secure payment of a portion of the purchase price of, or existing at the time of acquisition of, any tangible fixed asset acquired by the Borrower or any of its Subsidiaries may be created or suffered to exist upon such fixed asset if the outstanding principal amount of the indebtedness secured by such Lien does not at any time exceed the purchase price paid by the Borrower or such Subsidiary for such fixed asset and such indebtedness secured by such Liens is permitted under Section 6.9; provided that such Lien does not encumber any other asset at any time owned by the Borrower or such Subsidiary, and provided, further, that not more than one such Lien shall encumber any such fixed asset at any one time. (VIII) Judgment and other similar liens, the existence of which judgment does not constitute a Default under Section 7.8. (IX) The interest or title of a lessor under any lease otherwise permitted under this Agreement with respect to the property subject to such lease to the extent performance of the monetary obligations of the Borrower or any of its Subsidiaries thereunder are not delinquent in an amount in excess of $100,000 in the aggregate. (X) Liens existing on the date of this Agreement as described on Schedule 6.7 attached hereto. 13 14 6.8 NOTICE OF DEFAULT. The Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Bank of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which might have a Material Adverse Effect or might materially adversely affect the ability of the Borrower to repay the Obligations. 6.9 DEBT. The Borrower will not, nor will it permit any Subsidiary to, incur or permit to remain outstanding, debt for borrowed money or installment obligations in an aggregate principal amount which, together with undertakings of others guaranteed by the Borrower or for which the Borrower otherwise is secondarily liable, exceeds $200,000 at any time, except the following ("Permitted Debt"): (i) indebtedness owing to the Bank or, with respect to the Subsidiaries, any of the Bank's affiliates, (ii) indebtedness of any Subsidiary of the Borrower owing to any other Subsidiary of the Borrower, and (iii) other indebtedness reflected in the latest financial statement of the Borrower furnished to the Bank prior to execution of this Agreement and not to be paid with proceeds of borrowings under this Agreement. For purposes of this covenant, the sale of any accounts receivable is deemed the incurring of debt for borrowed money. Nothing in this Section shall prohibit trade accounts payable and receivable between the Borrower and its Subsidiaries or between any Subsidiary of the Borrower and any other Subsidiary of the Borrower arising in the ordinary course of business and on terms not less favorable to the Borrower than those which could be obtained if the related transaction were an arm's length transaction with a person other than an affiliate. 6.10 GUARANTIES. The Borrower will not, nor will it permit any Subsidiary to, guarantee or otherwise become or remain secondarily liable on the undertaking of another in an aggregate amount which, together with the aggregate outstanding principal amount of debt for borrowed money and other installment obligations of the Borrower and its Subsidiaries, exceeds $200,000 at any time, except for (i) endorsement of drafts for deposit and collection in the ordinary course of business and (ii) guaranties by the Subsidiaries of the Borrower of any Permitted Debt owing by the Borrower or by any other Subsidiary of the Borrower. 6.11 ADVANCES AND INVESTMENTS. The Borrower will not, nor will it permit any Subsidiary to, purchase or acquire any securities of, or make any loans or advances to, or investments in, any Person, except (i) obligations of the United States Government, open market commercial paper rated one of the top two ratings by a rating agency of recognized standing, or certificates of deposit in insured financial institutions, and (ii) loans and advances by any Subsidiary of the Borrower to any other Subsidiary of the Borrower and advances (without any repayment obligation) by any Subsidiary of the Borrower to the Borrower. Nothing in this Section shall prohibit trade accounts payable and receivable between the Borrower and its Subsidiaries or between any Subsidiary of the Borrower and any other Subsidiary of the Borrower arising in the ordinary course of business and on terms not less favorable to the Borrower than those which could be obtained if the related transaction were an arm's length transaction with a person other than an affiliate. 6.12 FUNDED DEBT TO EBITDA RATIO. The Borrower will not permit or suffer the ratio of (i) the Funded Debt of the Borrower as of the fiscal quarter end corresponding to the determination date to (ii) the EBITDA of the Borrower for the period of four consecutive quarters then ending 14 15 to exceed (a) 4.50 to 1.00 at December 31, 1999 or (b) 3.00 to 1.00 at March 31, 2000 and thereafter, as of the end of each fiscal quarter. 6.13 EBITDA. The Borrower will not permit its EBITDA for the period commencing with the first day of the then current fiscal year of the Borrower to the determination date to be less than (i) ($4,300,000) at March 31, 1999, (ii) ($4,800,000) at June 30, 1999, (iii) ($2,600,000) at September 30, 1999, (iv) $1,200,000 at December 31, 1999, (v) $500,000 at March 31, 2000, (vi) $2,000,000 at June 30, 2000, (vii) $4,000,000 at September 30, 2000, (viii) $6,000,000 at December 31, 2000 and (ix) $500,000 at March 31, 2001. 6.14 FIXED CHARGE COVERAGE RATIO. The Borrower will not permit its Fixed Charge Coverage Ratio for the period of four consecutive fiscal quarters immediately preceding the determination date to be less than (i) 1.35 to 1.00 at March 31, 2000 or (ii) 1.50 to 1.00 at June 30, 2000 and thereafter, as of the end of each fiscal quarter. 6.15 DISPOSITION OF ASSETS. The Borrower will not, nor will it permit any Subsidiary to, sell, lease, license, transfer, assign or otherwise dispose of all or a substantial portion of its business, assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether in one or a series of transactions, other than (i) inventory sold in the ordinary course of business upon customary credit terms, (ii) sales of scrap or obsolete material or equipment and (iii) transfers between Subsidiaries of the Borrower. 6.16 DIVIDENDS. The Borrower will not make, pay, declare or authorize any dividend, payment or other distribution in respect of any class of its capital stock or any dividend, payment or distribution in connection with the redemption, purchase, retirement or other acquisition, directly or indirectly, of any shares of its capital stock, other than such dividends, payments or other distributions to the extent payable solely in shares of the capital stock of the Borrower. For purposes of this Section 6.16, "capital stock" shall include capital stock and any securities exchangeable for or convertible into capital stock and any warrants, rights or other options to purchase or otherwise acquire capital stock or such securities. 6.17 NEGATIVE PLEDGE LIMITATION. The Borrower will not enter into any agreement, with any person other than the Bank pursuant hereto, which prohibits or limits the ability of the Borrower or any Subsidiary to create, incur, assume or suffer to exist any Lien upon any of its assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether now owned or hereafter acquired. 6.18 YEAR 2000 ISSUES. The Borrower will take all actions reasonably necessary to assure that Year 2000 Issues will not have a Material Adverse Effect. Upon the Bank's request, the Borrower will provide the Bank with a description of its plan to address Year 2000 Issues, including updates and progress reports. The Borrower will advise the Bank of any reasonably anticipated Material Adverse Effect as a result of Year 2000 Issues. 15 16 ARTICLE 7 - DEFAULTS The occurrence of any one or more of the following events constitutes a Default: 7.1 Any warranty made or deemed made by or on behalf of the Borrower or any Subsidiary to the Bank under or in connection with this Agreement, any Loan, any Letter of Credit or any certificate or information delivered in connection with this Agreement or the Note is materially false on the date as of which it is made. 7.2 The principal of the Note is not paid when due, or any interest or any facility fee or other obligations under this Agreement or the Note are not paid within three days after they become due. 7.3 The Borrower breaches any of the terms of Article 6 and, with respect to any breach under 6.1, 6.3, 6.4, 6.5, 6.7, 6.8, 6.9, 6.10, 6.11, 6.17 or 6.18, such breach is not remedied within 10 days. 7.4 The Borrower breaches (other than a breach which constitutes a Default under Section 7.1, 7.2 or 7.3) any of the terms of this Agreement and such breach is not remedied within thirty days after written notice from the Bank. 7.5 The Borrower or any Subsidiary fails to pay any debt for borrowed money when due, which individually or together with other such debt as to which any such failure exists has an aggregate outstanding principal amount in excess of $100,000; or the Borrower or any Subsidiary defaults in the performance of any term contained in any agreement under which that debt was created or is governed, the effect of which is to cause, or to permit the holder or holders of that debt to cause, that debt to become due prior to its stated maturity; or any debt of the Borrower or any Subsidiary is declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to its stated maturity, which individually or together with other such debt as to which any such failure exists has an aggregate outstanding principal amount in excess of $100,000; or the Borrower or any Subsidiary does not pay, or admits in writing its inability to pay, its debts generally as they become due. 7.6 The Borrower or any Subsidiary (i) has an order for relief entered with respect to it under present or future Federal bankruptcy laws, (ii) makes an assignment for the benefit of creditors, (iii) applies for, seeks, consents to, or acquiesces in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its property, (iv) institutes any proceeding seeking an order for relief under present or future Federal bankruptcy laws, or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or fails to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) takes any corporate action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fails to contest in good faith any appointment or proceeding described in Section 7.7. 7.7 Without the application, approval or consent of the Borrower or any Subsidiary, a receiver, trustee, examiner, liquidator or similar official is appointed for the Borrower or any 16 17 Subsidiary or any substantial part of its property, or a proceeding described in Section 7.6(iv) is instituted against the Borrower or any Subsidiary and that appointment continues undischarged or those proceedings continue undismissed or unstayed for a period of 60 consecutive days. 7.8 The Borrower or any Subsidiary shall fail within 30 days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $500,000, which is not stayed on appeal or otherwise being appropriately contested in good faith or is not fully insured against, within the applicable period of limitations for appealing such judgment or order and prior to the denial of any such appeal. 7.9 Any reportable event (as defined in Section 4043 of ERISA) occurs in connection with any plan (as defined in ERISA) which results in or could result in a Material Adverse Effect and such reportable event is not corrected within 30 days after the occurrence thereof. 7.10 Any Person, or two or more Persons acting in concert, acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 30% or more of the outstanding shares of the Borrower's voting stock. ARTICLE 8 - ACCELERATION; REMEDIES; AND AMENDMENTS 8.1 ACCELERATION. If any Default described in Section 7.6 or 7.7 occurs with respect to the Borrower, the obligation of the Bank to make Loans automatically terminates and the Obligations are immediately due and payable without any election or action on the part of the Bank. If any other Default occurs, the Bank may terminate or suspend its obligation to make Loans, or declare the Obligations due and payable, or both, whereupon the Obligations are immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower expressly waives. 8.2 PRESERVATION OF RIGHTS. No delay or omission of the Bank to exercise any right under this Agreement or the Note impairs that right nor can it be construed to waive any Default or acquiesce in any Default, and the making of a Loan notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to that Loan does not constitute a waiver or acquiescence. Any single or partial exercise of any right does not preclude any other or further exercise of it or the exercise of any other right, and no waiver, amendment or other variation of the terms of this Agreement or the Note is valid unless in writing signed by the Bank and the Borrower and then only to the extent that writing specifies. All remedies contained in this Agreement and the Note or by law afforded are cumulative and all are available to the Bank until the Obligations have been paid in full. 8.3 AMENDMENTS. Subject to the provisions of this Article 8, the Bank and the Borrower may enter into agreements supplementing this Agreement for the purpose of adding or modifying this Agreement or the Note or changing in any manner the rights of the Bank or the Borrower or waiving any Default. 17 18 8.4 SETOFF. In addition to and without limiting any rights of the Bank under applicable law, if the Borrower becomes insolvent, howsoever evidenced, or any Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other debt at any time held or owing by the Bank to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to the Bank, whether or all or any part of the Obligations are then due. ARTICLE 9 - GENERAL PROVISIONS 9.1 SURVIVAL OF WARRANTIES. All warranties of the Borrower contained in this Agreement survive the delivery of the Note and the making of the Loans and the issuance of Letters of Credit. 9.2 TAXES. Any taxes (excluding income taxes) or other similar assessments or charges payable or ruled payable by any governmental authority in respect of this Agreement and the Note must be paid by the Borrower, together with interest and penalties, if any. 9.3 EXPENSES; INDEMNIFICATION. The Borrower must reimburse the Bank for any costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Bank, who may be employees of the Bank) paid or incurred by the Bank in connection with the preparation, review, execution, delivery, amendment, modification, administration, collection and enforcement of this Agreement and the Note, provided that such attorneys' fees in connection with the preparation, review, execution and delivery of this Agreement and the Note for which the Borrower is responsible shall be only the portion of the aggregate amount of such fees in excess of $5,000. The Borrower further indemnifies the Bank, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including without limitation all expenses of litigation or preparation for litigation whether or not the Bank is a party) which any of them pay or incur arising out of or relating to this Agreement, the Note, the transactions described in this Agreement or the direct or indirect application or proposed application of the proceeds of any Loan, provided, however, that the Borrower shall not be required to indemnify the Bank or any such other person, to the extent, but only to the extent, that such losses, claims, damages, penalties, judgments, liabilities or expenses are of a type generally borne by lenders in the ordinary course of business and are not material in amount in the aggregate, or which are attributable to the gross negligence or willful misconduct of the Bank. The obligations of the Borrower under this Section survive the termination of this Agreement. 9.4 SUCCESSORS AND ASSIGNS. The terms of this Agreement and the Note bind and benefit the Borrower and the Bank and their respective successors and assigns, except that the Borrower has no right to assign its rights or obligations under this Agreement or the Note. The Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities participating interests in any Loan, the Note or the Commitment. The Bank may, with the consent of the Borrower, which consent may not be unreasonably withheld, assign to one or more banks or other entities all or any part of its rights and obligations under this Agreement or the Note, and the Borrower releases the Bank for the amount so assigned. 18 19 9.5 GIVING NOTICE. Except as otherwise permitted by Section 2.7 with respect to borrowing notices, all notices, requests and other communications to any party must be in writing (including bank wire, telex, facsimile transmission or similar writing) and must be given to a party: (y) in the case of the Borrower or the Bank, at its address, facsimile number or telex number set forth on the signature page below, or (z) in the case of any party, whatever other address, facsimile number or telex number that party specifies for the purpose, by notice to the other. Each notice, request or other communication is effective (i) if given by telex, when it is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 72 hours after that communication is deposited in the mails with first class postage prepaid, addressed as required, or (iv) if given by any other means, when delivered at the address specified in this Section. However, notices to the Bank under Article 2 are not effective until received. ARTICLE 10 - GOVERNING LAW; JURISDICTION; JURY TRIAL WAIVER 10.1 CHOICE OF LAW. This Agreement and the Note are to be construed in accordance with the internal laws (but not the law of conflicts) of Michigan. 10.2 CONSENT TO JURISDICTION. The Borrower irrevocably submits to the non-exclusive jurisdiction of any United States federal or Michigan state court sitting in Michigan in any action or proceeding arising out of or relating to any Loan, and the Borrower irrevocably agrees that all such claims may be heard and determined in any such court and irrevocably waives any present and future objection it may have as to the venue of any action or proceeding brought in that court, or that court is an inconvenient forum. Any judicial proceeding by the Borrower against the Bank or any affiliate of the Bank involving, directly or indirectly, any matter in any way arising out of, related to, or connected with any Loan must be brought only in a court in Michigan. 10.3 WAIVER OF JURY TRIAL. The Bank and the Borrower knowingly and voluntarily waive any right either of them to have to a trial by jury in any proceeding (whether sounding in contract or tort) which is in any way connected with this or any related agreement, or the relationship established under them. This provision may only be modified in a written instrument executed by the Bank and the Borrower. [The rest of this page intentionally left blank.] 19 20 EXECUTED as of the date first written above. BORROWER: BANK: PERCEPTRON, INC. NBD BANK By: John J. Garber By: Donna Boris ----------------------- ------------------------- Its: Vice President Its: Vice President ----------------------- ------------------------ ADDRESS FOR NOTICES: ADDRESS FOR NOTICES: 47827 Halyard 38601 Twelve Mile Road Plymouth, Michigan 48170 Farmington Hills, Michigan 48331 Phone: (734) 414-4816 Phone: (248) 488-0652 Fax: (734) 414-4840 Fax: (248) 488-0634 Attention: John Garber Attention: Donna Boris 20 21 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of August 24, 1999 (this "Amendment"), is by and between PERCEPTRON, INC., a Michigan corporation (the "Borrower"), and BANK ONE, MICHIGAN, a Michigan banking corporation (the "Bank"). RECITALS A. The Borrower and the Bank have entered into the Credit Agreement, dated May 28, 1999 (the "Credit Agreement"), pursuant to which the Bank provides to the Borrower a revolving credit facility, including letters of credit, in the aggregate principal amount not to exceed $15,000,000. B. The Borrower now desires that the Credit Agreement be amended in order to modify the financial covenants and the pricing terms applicable to the loans under the Credit Agreement, and the Bank is willing to so amend the Credit Agreement on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein and in the Credit Agreement contained, the parties hereto agree as follows: ARTICLE 1. AMENDMENTS TO CREDIT AGREEMENT Upon the date that the conditions precedent set forth in Article 2 of this Amendment are satisfied, which date (the "Amendment Date") shall be determined by the Bank in its sole discretion, the Credit Agreement hereby is amended as follows, provided that such amendments pursuant to Sections 1.2, 1.3, 1.4 and 1.5 below shall be deemed retroactively effective as of June 30, 1999: 1.1 The definition of the term "Applicable Margin" in Article 1 is amended and restated in full as follows: "Applicable Margin" means the percent per annum added to the Eurodollar Rate if that rate is chosen by the Borrower, and as determined pursuant to Section 2.9 and by reference to the following matrix: 22
Funded Debt/ Eurodollar EBITDA Rate plus ------ --------- Greater than 1.625% 3.00 to 1.00 Equal to or greater than 1.50% 1.00 to 1.00 but not greater than 3.00 to 1.00 Less than 1.00 to 1.00 1.25%
; provided that the "Applicable Margin" for each existing Loan that bears interest at the Eurodollar Rate and with respect to which the current Eurodollar Interest Period commenced prior to the Amendment Date shall continue as it was at the time of the commencement of such current Eurodollar Interest Period, through the end of such current Eurodollar Interest Period. 1.2 The following definitions of the terms "Tangible Net Worth" and "Total Liabilities", respectively are added to Article 1 in alphabetical order: "Tangible Net Worth" means, as of any date, (a) the amount of any capital stock, paid in capital and similar equity accounts plus (or minus in the case of a deficit) the capital surplus and retained earnings and the amount of any foreign currency translation adjustment account shown as a capital account, less (b) the net book value of all items of the following character which are included in assets: (i) goodwill, including, without limitation, the excess of cost over book value of any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) patents, trademarks, trade names and copyrights, (v) treasury stock, (vi) deferred taxes and deferred charges, (vii) franchises, licenses and permits, and (viii) other assets which are deemed intangible assets under GAAP; all as determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP. "Total Liabilities" means, as of any date, the following, as determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP: all obligations which, in accordance with GAAP, are or should be classified as liabilities on a balance sheet and all contingent liabilities. 1.3 Each reference to "Sections 6.12, 6.13 and 6.14" in subparts (i) and (ii) of Section 6.1 is deleted, and the following is substituted in place thereof: Sections 6.12, 6.13, 6.14 and 6.19. -2- 23 1.4 Sections 6.12, 6.13 and 6.14 are amended and restated in full as follows: 6.12 FUNDED DEBT TO EBITDA RATIO. The Borrower will not permit or suffer the ratio of (i) the Funded Debt of the Borrower as of the fiscal quarter end corresponding to the determination date to (ii) the EBITDA of the Borrower for the period of four consecutive quarters then ending to exceed 3.00 to 1.00, such ratio to be determined as of the end of each fiscal quarter, commencing with the fiscal quarter ending on or about June 30, 2000. 6.13 EBITDA. The Borrower will not permit its EBITDA to be less than (i) ($4,300,000) for the period from January 1, 1999 through the end of its fiscal quarter ending on or about March 31, 1999, (ii) ($6,200,000) for the period from January 1, 1999 through the end of its fiscal quarter ending on or about June 30, 1999, (iii) $1,500,000 for the period from July 1, 1999 through the end of its fiscal quarter ending on or about September 30, 1999, (iv) $2,100,000 for the period from July 1, 1999 through the end of its fiscal quarter ending on or about December 31, 1999, (v) $3,000,000 for the period from July 1, 1999 through the end of its fiscal quarter ending on or about March 31, 2000, (vi) $4,500,000 for the period from July 1, 1999 through the end of its fiscal quarter ending on or about June 30, 2000, (vii) $1,800,000 for the period from July 1, 2000 through the end of its fiscal quarter ending on or about September 30, 2000, (viii) $3,600,000 from the period from July 1, 2000 through the end of its fiscal quarter ending on or about December 31, 2000 and (ix) $4,300,000 for the period from July 1, 2000 through the end of its fiscal quarter ending on or about March 31, 2001. 6.14 FIXED CHARGE COVERAGE RATIO. The Borrower will not permit its Fixed Charge Coverage Ratio for the period of four consecutive fiscal quarters immediately preceding the fiscal quarter end corresponding to the determination date to be less than (i) 1.20 to 1.00 at June 30, 2000, (ii) 1.35 to 1.00 at September 30, 2000 or (iii) 1.50 to 1.00 at December 31, 2000 and thereafter, as of the end of each fiscal quarter. 1.5 The following Section 6.19 is added to the end of Article 6: 6.19 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. The Borrower will not permit the ratio of Total Liabilities to Tangible Net Worth to exceed 1.00 to 1.00 at any time. -3- 24 ARTICLE 2. CONDITIONS PRECEDENT TO AMENDMENTS As conditions precedent to the effectiveness of the amendments to the Credit Agreement set forth in Article 1 of this Amendment, the Bank shall receive this Amendment duly executed on behalf of the Borrower, and certified copies of such documents evidencing necessary corporate action of the Borrower with respect to this Amendment and the transactions contemplated hereby, as the Bank may reasonably request and in form and substance satisfactory to the Bank. ARTICLE 3. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Amendment, the Borrower represents and warrants that: 3.1 The execution, delivery and performance by the Borrower of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Borrower's charter or by-laws, or of any contract or undertaking to which the Borrower is a party or by which the Borrower or its property is or may be bound or affected. 3.2 This Amendment is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. 3.3 No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person or entity, including without limitation any creditor or stockholder of the Borrower, is required on the part of the Borrower in connection with the execution, delivery and performance of this Amendment or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Amendment. 3.4 After giving effect to the amendments contained in Article 1 of this Amendment, the representations and warranties contained in Article 5 of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. 3.5 No Default or Unmatured Default has occurred and is continuing. -4- 25 ARTICLE 4. MISCELLANEOUS 4.1 If the Borrower shall fail to perform or observe any term, covenant or agreement in this Amendment, or any representation or warranty made by the Borrower in this Amendment shall prove to have been incorrect in any material respect when made, such occurrence shall be deemed to constitute a Default. 4.2 All references to the Credit Agreement in any other document, instrument or certificate referred to in the Credit Agreement or delivered in connection therewith or pursuant thereto, hereafter shall be deemed references to the Credit Agreement, as amended hereby. 4.3 Subject to the amendments herein provided, the Credit Agreement shall in all respects continue in full force and effect. 4.4 Capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 4.5 This Amendment shall be governed by and construed in accordance with the laws of the State of Michigan. 4.6 The Borrower agrees to pay the reasonable fees and expenses of Dickinson Wright PLLC, counsel for the Bank, in connection with the negotiation and preparation of this Amendment and the documents referred to herein and the consummation of the transactions contemplated hereby, and in connection with advising the Bank as to its rights and responsibilities with respect thereto. 4.7 This Amendment may be executed upon any number of counterparts with the same effect as if the signatures thereto were upon the same instrument. [The rest of this page intentionally left blank.] -5- 26 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first-above written. PERCEPTRON, INC. By: /S/ JOHN J. GARBER -------------------------- Its: Vice President BANK ONE, MICHIGAN (formerly known as NBD Bank) By: /S/ DONNA BORIS -------------------------- Its Vice President -6- EX-10.28 3 FIRST AMEND. GLOBAL TEAM MEMBER STOCK OPTION PLAN 1 EXHIBIT 10.28 FIRST AMENDMENT TO THE PERCEPTRON, INC. 1998 GLOBAL TEAM MEMBER STOCK OPTION PLAN Pursuant to the Amendment provisions in Section 9 of the Perceptron, Inc. 1998 Global Team Member Stock Option Plan ("Plan") and the approval of the Board of Directors of Perceptron, Inc. ("Company"), the Plan is hereby amended as set forth below: 1. Section 4.1 of the Plan (Shares Available for Options) shall be amended and restated in its entirety to read as follows: 4.1 SHARES AVAILABLE FOR OPTIONS. The Board shall reserve a total of 500,000 shares of Common Stock for purposes of the Plan. THIS FIRST AMENDMENT is hereby adopted as of June 24, 1999. PERCEPTRON, INC. By:/s/ Alfred A. Pease ------------------------------- Alfred A. Pease, Chairman, President and Chief Executive Officer EX-10.29 4 SECOND AMEND. GLOBAL TEAM MEMBER STOCK OPTION PLAN 1 EXHIBIT 10.29 SECOND AMENDMENT TO THE PERCEPTRON, INC. 1998 GLOBAL TEAM MEMBER STOCK OPTION PLAN Pursuant to the Amendment provisions in Section 9 of the Perceptron, Inc. 1998 Global Team Member Stock Option Plan ("Plan") and the approval of the Board of Directors of Perceptron, Inc. ("Company"), the Plan is hereby amended as set forth below: 1. Section 4.1 of the Plan (Shares Available for Options) shall be amended and restated in its entirety to read as follows: 4.1 SHARES AVAILABLE FOR OPTIONS. The Board shall reserve a total of 700,000 shares of Common Stock for purposes of the Plan. THIS SECOND AMENDMENT is hereby adopted as of September 3, 1999. PERCEPTRON, INC. By: /s/ Alfred A. Pease --------------------------------------- Alfred A. Pease, Chairman, President and Chief Executive Officer EX-21 5 A LIST OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 SUBSIDIARIES OF PERCEPTRON, INC. The following three corporations are subsidiaries of Perceptron, Inc. 1. Perceptron Europe B.V., a corporation organized under the laws of the Netherlands. 2. Perceptron (Europe) GmbH, a corporation organized under the laws of Germany, is a wholly owned subsidiary of Perceptron Europe B.V. 3. Trident Systems, Inc., a corporation organized under the laws of Georgia. 51 EX-23 6 CONSENT OF EXPERTS 1 EXHIBIT 23 [PRICEWATERHOUSECOOPERS LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Perceptron, Inc. and Subsidiaries on Form S-8 (File Nos. 33-63666, 33-63664, 33-85656, 33-93910, 333-00444, 333-00446, 333-65001 and 333-65007) and on Form S-3 (File Nos. 33-78594, 333-24239 and 333-29263) of our report dated August 11, 1999, on our audits of the consolidated financial statements and financial statement schedule of Perceptron, Inc. and Subsidiaries as of June 30, 1999, December 31, 1998 and 1997, and for the six month period ended June 30, 1999 and the years ended December 31, 1998, 1997 and 1996, which report is included in this Transition Report on Form 10-K for the six month period ended June 30, 1999. /s/ PricewaterhouseCoopers LLP Detroit, Michigan September 24, 1999 52 EX-27 7 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS JUN-30-1999 JAN-01-1999 JUN-30-1999 4,205,000 0 25,957,000 (218,000) 12,323,000 43,574,000 17,233,000 (6,121,000) 61,334,000 9,005,000 4,265,000 0 0 82,000 47,982,000 61,334,000 21,256,000 21,256,000 10,768,000 10,768,000 17,148,000 0 0 (7,349,000) (2,489,000) (4,860,000) 0 0 0 (4,860,000) (0.59) (0.59)
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